DeFi

Author: Rebecca Pignataro

The primary function of a credit institution is to issue loans and acquire deposits from its customers. By acting as an intermediary, in fact, the bank is able to put surplus units (households) in contact with deficit units (businesses) by efficiently distributing resources within the financial system and its agents.

With its intervention, in fact, the bank manages to meet the needs of its clients by operating the transformation of resources, thus obtaining short-term liabilities as opposed to long-term assets in the balance sheet.

Most of the financing in the current market is done through banks, but it is possible, through fintech innovations, to disintermediate and thus bring together units in surplus with those in deficit through DeFi.

DeFi (or "decentralized finance") is a general term used to refer to financial services performed on public blockchains, primarily the Ethereum blockchain. With DeFi, you can perform the majority of transactions supported by traditional banks, such as earning interest, activating loans, lending, buying insurance policies, exchanging derivatives, trading resources, and more... with the difference being that all of this happens faster and doesn't require documentation or the presence of a third party. As with all cryptocurrency transactions, DeFi is global, peer-to-peer (i.e. transactions occur directly between two people, without the intermediary of a centralized system), pseudonym-based, and open to all.

The DeFi system, therefore, has the potential to create more open, free and fair financial markets, accessible to anyone with an Internet connection.

But let's look at how the DeFi system works. Users typically interact with DeFi's services through decentralized software applications called dapp (from the English "decentralized apps"), most of which use the Ethereum blockchain. Unlike using a traditional bank's service, using DeFi services does not require filling out an application or opening an account. Typically this is for loans, mortgages, or buying derivatives.

Some advantages of DeFi are:

The speed of opening a position as you do not have to apply for an account but only need to have a portfolio. You can also have an alias and transfer your funds to another portfolio at any time. But what really is the strong point of these new digital financial instruments is transparency: in fact, all parties involved are able to view the transactions made, unlike credit institutions that rarely grant this information.

Alongside the advantages, however, there are always disadvantages: first of all, the volatility of currencies like Ethereum, which can make transactions from cheap to very expensive depending on the mood of the market. Second, being a peer-to-peer platform the documentation is not available from a bank, but you will have to store this information on your own.