Recently, investors have shown considerable interest in DeFi projects. This can be understood from the chart of total value locked (USD) in DeFi projects on the website called DeFiPulse. At the moment, the total value locked in DeFi projects almost 4 times as high as it was 90 days ago. Furthermore, the costs of some DeFi projects’ tokens on exchanges have sometimes increased even more than 10 times. For the comparison, the price of gold for the same period of time increased only 1.2 times.
As I’ve shown above, DeFi is quite popular at the moment among investors, however what is DeFi? According to the website DeFiPulse, DeFi (decentralized finance) is a complex of services based on smart contracts and decentralized applications (Dapps) that make up a decentralized financial ecosystem and provide users with access to a variety of financial services such as investing, lending, trading on exchanges, etc.
The main aim of DeFi is to change traditional financial system on new trustless blockchain-based one. At the moment, there are accessible such services as borrowing & lending, using decentralized exchanges and wallets, making payments, holding crypto-assets linked to real life assets and last, but not least, insurance.
Like everything in this world, DeFi has its pros and cons.
As regards advantages, firstly, anyone can get one or another financial service avoiding banks and their high fees. Secondly, all transactions in the blockchain are open-source for everyone. Finally, there are a plenty of ways to combine DeFi applications with existing services using unique smart contract-based protocols.
Speaking about drawbacks, firstly, since DeFi applications are still a new domain there is a chance to lose your money due to hacking of some unreliable smart contracts. Secondly, because of the little speed of transactions’ confirmation of Ethereum, on which at the moment based the vast majority of DeFi apps, the fees for confirmation sometimes really high.
In conclusion, there is no doubt that DeFi will replace the traditional financial system in the future, however, it needs some time to overcome those obstacles that hinder the development of the system now.
Sources:
https://www.coindesk.com/what-is-defi
https://academy.binance.com/en/glossary/defi