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KASH - What is Decentralized Finance (DeFi):

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A Beginner Friendly Guide
Kash Team

https://kash-defi.medium.com/what-is-decentralized-finance-defi-a-beginner-friendly-guide-9d08644cd780

Decentralized Finance (DeFi) is a blockchain technology and non-custodial financial product that offers more control over your money. In fact, DeFi offers many benefits that our current Traditional Financial system can’t, such as transparency, self-custody, 24/7 open market, less fees, fast transactions and more. The infrastructure that DeFi uses removes the barriers in today’s financial system like capital requirements and access to foreign markets, hence, making the system more accessible to everyone. Interesting, right?

Even though, being fairly new, Decentralized Finance (DeFi) drew many people’s attention. DeFi, with its financial applications, simplifies the financial services by making banking cheaper, easier and more accessible to people all around the world than what TradFi (Traditional Finance) can provide. To be able to understand what you will read in this article, you don’t need to be a finance nerd or crypto bull, you just need to be someone curious who gives value to your hard-won dollars…

Although it’s a new concept in our lives, DeFi is expeditiously going mainstream. Of course, the smart contracts, protocols and d’apps (decentralized applications) play a crucial role in DeFi to attain its goal of “reaching the masses”.

To be able to understand how DeFi works, here are some terms you should know:

Smart Contracts are the codes that execute the orders of buyers and sellers automatically. They reduce human error significantly and are an important asset in decentralization.

Protocols are the layers working on top of blockchains that run smart contracts in a platform.

Decentralized applications, also known as d’apps, bring protocols to the masses with an easy user interface that makes it look simple to use. Thanks to d’apps, DeFi will reach the masses.

Proof of Work requires solving complex math problems for ensuring the network’s safety. Spends too much computing effort and energy while creating a new block on the blockchain.

Proof of Stake is another network for decentralized systems. There are validators (think of them as miners that sign new blocks) and delegators (stake owners or coin holders) that secure the system. On the contrary, to reach a consensus, PoS offers more decentralization by promoting a more participatory and democratic network. Also consumes significantly less energy than PoW systems.

Is DeFi the “Future of Finance”?

Let’s make it clearer. Decentralized Finance (DeFi) is a blockchain technology people can use easily for their financial needs without any centralized authority. It removes the middleman and strict regulations, and also gives you more power over your money. DeFi is more than a tool for sending and receiving money. Main purpose of Decentralized Finance is to offer financial solutions- lending, borrowing, trading, insurance etc, just like it’s competitor TradFi (Traditional Finance). DeFi provides an open-source, permissionless and transparent service for everybody’s financial needs.

DeFi as an alternative to TradFi is a new concept in our current financial system. On top of the individual benefits of it, it is also better for the environment than Bitcoin and other PoW based crypto assets. To read about how decentralized consensus mechanism PoS is better for the environment click here. This system also consumes less resources than today’s TradFi since it does not need infrastructure like buildings, ATMs, paper money, or a work force to implement customers’ needs, Traditional Finance requires significantly more resources than Decentralized Finance.

TradFi, What Went Wrong?

The term “TradFi” refers to traditional finance, and essentially relates to the centralized, conventional banking system. First of all, Traditional Finance has a significant role in many people’s daily lives due to being the most common financial services provider in the market. TradFi institutions are centralized, regulated by the governments and rely on a lot of paperwork. Also, the Central Banks that are under the influence of the governments, implement monetary policy through TradFi institutions.

TradFi services are expensive to use. For example, Western Union charges $10 to send $100 cash from the United States to someone’s bank account in Argentina, and it can take up to 4 days to receive. With DeFi it costs less than $1 and takes seconds to receive.

TradFi is also not flexible enough to easily absorb the new advancements in finance, and not transparent like DeFi. Flexibility is an important aspect to catch up with the advancements in tech. Each day our life becomes more and more digitized , as well as solutions to our financial needs. DeFi provides up-to -date technology for banking, payments, saving and investment opportunities with less cost. While in TradFi, transferring money from one bank to another takes more time, in DeFi, transferring money between different blockchains naturally takes less time. Also, considering the ongoing developments in DeFi, especially after the system upgrade on Ethereum and Cosmos blockchains, the transaction fees will be even less for the users. In terms of transparency, blockchains keep everything more transparent since everyone can observe the executed transactions on the blockchain. Another important thing is, unlike TradFi, DeFi gives people more power to participate in the decision making process for their governance.

FinTech companies that provide more flexible financial solutions than TradFi, are less centralized, and have a more progressive approach to finance than TradFi yet still carry more similarities to TradFi and do not even come close to DeFi. FinTech companies, like Venmo and Transferwise provide more flexible financial solutions for their customers within Traditional Finance. However, their customers still pay high fees and can face problems such as account suspension, verification issues and delay in money transfer.

As a matter of fact, TradFi is getting older, slower and not flexible enough for today’s rapidly advancing technology and increasing demand for new financial services or solutions. Today, we live in a world where people are more educated and more skeptical. An institution that is more expensive, less transparent and private will inevitably lose its power against DeFi.

In Decentralized Finance, people join the decision making process by voting on the governance proposals which makes finance more democratic, open, participatory and trustworthy. However, in TradFi, there is no participation in the decision making process for finance. Centrally governed institutions make their own decisions that might not always be in the public’s best interest. Therefore, DeFi gives people more power of managing “money” in contrast to its predecessor TradFi.