When Code Speaks: What Does DeFi Really Offer?

Last week we talked about traditional financial systems and money. We also touched on “DeFi,” the decentralized alternative that blockchain (with its decentralization) offers to these traditional systems.

Just to recap, DeFi (Decentralized Finance) is a system that aims to carry out financial transactions directly between users without needing intermediaries.

Instead of banks or intermediary institutions, transactions run on open-source smart contracts, and the core idea is this:

“Trust the code, not the institutions.”

So this week, let’s take a closer look at how “DeFi,” one of the key drivers of the 2021 crypto boom, actually works. Let’s try to understand what kind of alternative system it proposes and where it can be used.

What Does DeFi Do? Where Is It Used?

Going through the current uses of DeFi might help clarify this concept that can seem quite abstract.

💸 1. Stablecoins → Tokens pegged to the value of 1 dollar to reduce the volatility of cryptocurrencies. Examples: DAI (collateralized), USDC (reserve-backed), FRAX (hybrid). Discussion: Are they really “stable”? That’s a long story and could be a whole other article :) Let’s not scare anyone off :)

🏦 2. Lending & Borrowing → Works like taking out a loan from a bank, but you just provide collateral and deal directly with another person, no middleman. Examples: Aave, Compound are some of the first projects in this space and are still operating. Example Use: Using your crypto as collateral to borrow USDC.

🔄 3. DEX, Decentralized Exchanges → Any crypto trade happens directly between two wallets without an intermediary. Examples: Uniswap, Curve, some of the first decentralized exchanges. Difference: You connect your wallet to a decentralized exchange, there’s no order book. Just liquidity pools positioned within the exchanges.

🌾 4. Yield Farming / Yield Strategies → Using the crypto sitting in your wallet in different pools to earn returns. Examples: Yearn Finance, Beefy. Risk: High APY but also high risk.

📈 5. Derivatives → Futures or contracts that let you take positions based on future price predictions. Examples: dYdX, Synthetix, decentralized exchanges that allow you to trade futures on cryptocurrencies. You can buy futures contracts betting on whether a cryptocurrency’s price will fall or rise. Popularity: The new platforms for Web3 traders.

What DeFi Brings (Advantages)

You don’t need a bank account to join the decentralized finance system; just a cryptocurrency wallet will do.
These systems are managed transparently through smart contracts; you can access them 24/7, weekdays or weekends, from any country you like.
No need for ID, passport, or bank account statements; you just transact with your own wallet, and you’re in control of all operations. Mistakes too, of course :)

But It’s Still a Bit Early and a Bit Risky

DeFi systems or products offer a real alternative to traditional financial systems, which have somewhat strayed from their purpose and become a bit corrupt over time. And they do so with a complete paradigm shift. But these systems are still in their infancy.

There are some issues I briefly mentioned in last week’s article. There can be vulnerabilities in the written code and/or smart contracts. The uncertainty of regulations means that the money entering these systems has almost no guarantees, at least for now.

Sudden changes in collateral ratios or liquidity pools can affect the entire system in an instant, and the system we thought was stable or secure can collapse just like that.

DeFi aims for an “open, fair, and accessible financial system,” but the road to this goal is still bumpy.

Still, it offers a completely different option: an alternative to the traditional system, which is increasingly prone to becoming less fair in terms of access and circulation. This alternative might mature and grow, or it might pave the way for entirely different alternatives.

In the face of the fact that traditional financial systems aren’t fair, even if everything hasn’t fallen into place yet, DeFi offers us a real alternative.

💬 Discussion Question Do you think these example applications of DeFi truly represent the future of finance? Or are they still just niche solutions for a specific crowd?

💸 Stablecoin Projects DAI → https://makerdao.com/en/ USDC → https://www.circle.com/en/usdc FRAX → https://frax.finance/

🏦 Lending / Borrowing

Aave → https://aave.com/ Compound → https://compound.finance/

🔄 Decentralized Exchanges (DEX) Uniswap → https://uniswap.org/ Curve → https://curve.fi/

🌾 Yield Farming / Yield Strategies Yearn Finance → https://yearn.finance/ Beefy → https://beefy.finance/

📈 Derivatives dYdX → https://dydx.trade/ Synthetix → https://synthetix.io/