“DeFi (Decentralized Finance)” is the name given to the set of financial products and services made available using blockchain technology. Through "smart contracts" it is thus possible to make various financial products available, such as example, payment systems, financial transactions, and loans, without the intervention of an intermediary, as is usually the case in traditional financial markets where there is the intervention of a financial entity.

In the traditional financial system, if you need a loan, you go to a bank (the intermediary) that bridges the gap between those who want to take out the loan and those who provide the capital (in this case, depositors), who are remunerated for this intermediation. In “DeFi”, since the bridge between those who want to take out the loan and those who want to make the capital available is automatically made by a “smart contract”, there is no need for any intermediation, which is the great revolution, then no need to trust a third party, be it a bank or the state. This is precisely why tech devotees refer to “DeFi” as the future of financial systems.

The basis of “DeFi” are “smart contracts”; that run in different ecosystems, such as Ethereum (ETH)[1] (the majority), Solana (SOL)[2], and Avalanche (AVAX)[3]; These being “smart contracts”, self-executing programs that allow the creation of applications on the blockchain, thus aiming to create a financial system that works at a global level in a more independent, transparent, less bureaucratic way, accessible to all and that at the same time be more efficient and cheaper than the traditional financial system.

The “DeFi” applications, usually called “DApps”, cover a huge range of financial products and services, namely, “Decentralized Exchanges (DEX)” and “lending protocols” and CDP.

The “DEX”, of which Uniswap[4] is an example, unlike Coinbase and Binance which are centralized Exchanges (“CEX”), are applications used to allow the purchase and sale of tokens, without the intervention of an intermediary, and the operations are made directly, through a “smart contract”, between users, in the “peer-to-peer” model.

On the other hand, the “lending protocols” are platforms that allow making loans in cryptocurrencies, and Aave[5] is currently one of the main “lending protocols” and CDP. How it works is quite simple: cryptocurrency holders “deposit” them in the so-called liquidity pools, since these protocols, as they are decentralized, do not have their liquidity, being remunerated through interest, so that those who want can be borrowed take out a loan, which is a much faster and cheaper process than a loan in the traditional financial market.

There are several advantages, not only as I mentioned above, the fact that it is cheaper and faster since there is no need for the intervention of a third party to carry out the validation, everything is done automatically through “smart contracts”, but also accessibility, since there is no territorial limitation or governmental control.

There are, however, some disadvantages, which we should be aware of, some of which are inherent to the technology itself, such as programming problems, which can result in vulnerabilities and security flaws that can be exploited by hackers (although many projects, aware of this fact, carry out regular audits of the code used), and on the other hand, others that are due to human nature, such as schemes and fraud, which can be carried out largely as a result of this is a whole new area of activity, still without major regulation, all this not to mention the enormous volatility that is characteristic of cryptocurrency markets.

I am sure that the traditional financial market will not be left without a lot of struggle, first of all, because many entities are making a lot of money from the inefficiencies of the market, however, I believe there is a very promising future for “DeFi”, as a more efficient market, agile and, above all, much more transparent, however, for this to happen, it will be necessary to have adequate regulation, namely in terms of money laundering, as has been requested by the Financial Action Task Force (FATF-FATF)[6], because only then can it have a more generalized adoption.

[1] https://ethereum.org/

[2] https://solana.com/

[3] https://www.avax.network/

[4] https://uniswap.org/

[5] https://aave.com/

[6] https://www.fatf-gafi.org/