045 – Decentralized Finance (DeFi) is a set of financial assets based on blockchain technology. In other words, DeFi is finance that seeks to ensure that there is no intermediary in transactions, i.e., consumers can interact directly with each other and are the ones who bid and ask without the need to go to a broker or brokerage house to negotiate their securities.
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Access to DeFi can be done through decentralized applications (dApps), which have the particularity that there is no authority or company behind the control or development of the same, but are the same users who interact in it according to their tastes and interests; generally these decentralized applications are developed under the Ethereum network. Among the dApps that are most used today are Uniswap, Pancake Swap, OpenSea, among others.
Now, it should be taken into consideration that DeFi’s are still small compared to centralized finance such as banks, but nevertheless, their growth has been exponential since mid-2017 and 2018.
A study published by “DeFi Llama” indicates that the total value of funds in DeFi reached an all-time high of $180 billion by the end of 2021; while by June 11, 2023 they estimate the value of those assets to be $43 billion, showing a drop in value of close to $150 billion, driven primarily by the decline of the Terra network.
Despite the precipitous drop in the value of DeFi, a study conducted by Andreessen Horowitz in 2022 showed that DeFi ranked as the 30th most valuable asset globally, but still lagged far behind centralized financials such as JPMorgan Chase, Bank of America, Goldman Sachs Group, among others.
Among the advantages of DeFi is firstly that they are easy to access, since they can be used worldwide and have no major restriction for their use, but varies according to the laws of each country. Secondly, there is the transparency of transactions, due to the fact that being under blockchain technology, there is a public domain record of each and every one of the transactions made. Finally, since there are no intermediaries involved, the operating costs for users are usually much lower compared to traditional financial transactions.
However, DeFi can present a great volatility in the value of its assets, as in the example presented previously, which shows that the valuation dropped by $150 billion dollars in less than 2 years, so it is not a method of savings or value over time. At the same time, they are exposed to hacker attacks or fraud on the platform, since, as they are not regulated by any entity, the risk of phishing and/or embezzlement of funds grows exponentially.
It is important to note that, although it is a relatively new technology, its use has been growing at a good pace in recent years, and it has great room for improvement, so it would not be surprising that in the coming years decentralized finance will be “competing” practically on a par with large banks and brokers worldwide. Today there are several DeFi exchanges that aim to integrate decentralized finance with centralized finance; this through the purchase of financial assets such as stocks and/or bonds offered on the stock market, but paying or granting as collateral valuable assets such as crypto-assets.
One of the platforms that is in the process of developing it successfully is Tradecurve, but is still in the process of creating and implementing the necessary tools for its proper functioning.