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What is DeFi? DeFi in All Details and Its Explanation

Not a day goes by that new terms, abbreviations and terms do not appear in the crypto world and its markets. Although the term DeFi has been around for a considerable time, it has recently managed to become a term that appears in many places.

With the use of the term DeFi a lot, naturally, many questions such as what is DeFi, what is DeFi Coin have also arisen.

With this content, we will try to convey to you what DeFi is, what it means and what is its logic in all details.

What is DeFi?

DeFi is a decentralized financial application ecosystem built on a blockchain.

DeFi expansion can be explained as follows; The term DeFi is formed from the first two letters of the English words Decentralized Finance.

As it can be understood from its definition, DeFi is the name given to financial structures that are not dependent on any authority or center. Actually technically Bitcoin, Ethereum etc. Cryptocurrency is also a decentralized financial structure and fits the definition of DeFi, but DeFi has a more detailed system at this point.

If only money transfers were enough to define financial structures, Bitcoin, Ethereum, and many other cryptocurrencies could qualify as DeFi. However, financial structures have much more detailed and advanced structures than sending and receiving money. At this point, DeFi steps in and defines this financial structure.

DeFi; as well as money transfers, just like a bank etc. They are decentralized financial systems that include advanced financial structures such as lending, stock exchange, insurance, clearing, and trade, such as a financial center. Therefore, cryptocurrencies such as Bitcoin and Ethereum cannot be fully qualified as DeFi.

What makes the DeFi system special is that it works without being dependent on any authority. For example, let’s take a bank. This bank provides services in many financial matters such as money transfer, futures earnings, lending, currency exchange, barter, commercial activities and is managed by a company, group or authority.

Now let’s imagine that this bank operates on crypto assets, that is, in the crypto market. If we add that this bank operates spontaneously without any company, group or authority at the head of it, we will clearly exemplify the DeFi system.

What Are the Advantages and Disadvantages of DeFi?

Although the DeFi system is full of advantages and opportunities, there are of course also disadvantages and negative sides.

First of all, let’s explain the advantages of DeFi:

  • While traditional financial transactions have intermediaries or control centers such as banks, financial institutions, governments, the DeFi system does not need any intermediaries.
  • In DeFi systems, anyone can benefit from this financial system and the obligations of traditional financial systems such as credit rating, blacklist, monthly income proof are eliminated.
  • Since it is a financial structure built on the blockchain, there is no error rate in DeFi systems or applications, and no records are lost.
  • No transactions can be hidden, censored or unrecorded in DeFi systems.
  • The point of application is simpler and more secure as the frameworks and policies to be applied in DeFi applications are determined from the beginning.
  • Since there is no middleman in DeFi systems, the costs are also minimized and fall to very low levels.

The disadvantages of DeFi systems that fully integrate and leverage traditional financial transactions, or in other words, banking, into the crypto world are as follows:

  • Since there is no control mechanism or tool, user errors in DeFi applications carry a very high risk.
  • Blockchains run slower than decentralized systems, and this is reflected in applications on the blockchain.
  • Using DeFi applications is more difficult and complex than traditional systems. So the user experience point requires knowledge and technique.
  • DeFi systems are messy. Therefore, finding the exact product and service you are looking for and making the best choice is proportional to the user’s knowledge.
  • Since each record means a separate data in DeFi transactions, there is no blockchain with such a data source yet.
  • As a new system, DeFi does not have a complete system structure, but it is also complex on the basis of users.

What are the Differences Between DeFi and Traditional Financial Transactions?

There is a control mechanism in traditional financial transactions. Banks or financial institutions are integrated into this center through a system called API. With this connection, data can be accessed simultaneously between all banks and financial institutions.

DeFi, on the other hand, is a kind of open banking or financial freedom. A new financial structure emerges with the DeFi system, which has a completely independent structure without being tied to any center. In this way, if access to a data is required, there is a chance to access this data without being connected to any center.

What are DeFi Usage Areas?

We can explain the usage areas of the DeFi system and its applications as follows:

Debit / Credit Transactions

Debit and credit transactions are the most popular operation of the DeFi system. Credit and debit transactions in DeFi systems are quite advantageous compared to traditional systems. If we summarize these advantages;

  • A loan or debit transaction can be terminated instantly.
  • Crypto and digital assets, which are not accepted as collateral in traditional financial transactions, can be shown as collateral.
  • There is no control system for credit and debt enforcement.
  • The need for trust and collateral is minimized, cryptographic verification methods are used.
  • Fees and costs are cheaper, faster and more accessible.

Banking Operations

Banking transactions can also be performed with DeFi applications. Many banking transactions are possible with the DeFi system, just as a bank offers the opportunity to exchange foreign currency, to open a time deposit account, to earn timely, to invest in gold, and to invest in foreign currency.

Banking transactions carried out with the DeFi system have very reasonable commission rates since there is no center in the middle.

Insurance

Another application offered with the DeFi system is insurance services. Since the insurance transactions in the DeFi system, like all other transactions, disable intermediaries, they are both affordable and low premiums and commissions are in question as the risks are distributed among all users.

Stockbroking

The DeFi system also allows stock exchange transactions. These exchanges are called decentralized exchanges or DEX. If one asks what DEX is or what DEX means, DEX is an abbreviation of the words Decentralized Exchange and the word Decentralized means decentralized as we mentioned before, while Exchange means stock market, clearing, exchange.

Decentralized exchange, or DEX, works with smart contracts. Through smart contracts signed digitally by users, it is possible to invest in crypto assets without any intermediaries. Due to the absence of intermediaries, commissions on DEX transactions are quite low.

Frequently Asked Questions About DeFi

In this section, we will share the answers to the most frequently asked questions about the DeFi system and its applications. This area will be updated regularly in line with your questions and requests.

What is DeFi Expansion?

The word DeFi is an abbreviation of Decentralized Finance and means decentralized finance.

What is DeFi Altcoin?

DeFi altcoin, PancakeSwap, UniSwap etc. They are crypto assets that are owned by DeFi applications themselves.

What Are DeFi Altcoins?

There are many DeFi altcoins, but the most well-known and popular ones are:

  • UniSwap (UNI)
  • PancakeSwap (CAKE)
  • Chainlink (LINK)
  • AAVE (AAVE)
  • Avalanche (AVAX)
  • Maker (MKR)
  • DAI (DAI)
  • Finance (YFI)
  • Synthetix (SNX)
  • SushiSwap (SUSHI)

What is Binance DeFi Category?

With the Binance DeFi category, crypto assets in DeFi applications can be purchased thanks to the BNB, Binance Coin’s BEP20 protocol, the Binance Smart Chain (BSC).

What is Bitcoin DeFi?

Bitcoin DeFi is DeFi applications built on the Bitcoin blockchain.

What is DeFi Coin?

DeFi Coin is a crypto asset project for Southeast Asian countries created specifically for the DeFi system. DeFi Coin is a crypto asset that hosts the DeFi system but is completely separate from the DeFi system.

How to Use DeFi?

In order to use DeFi, you must have a wallet account such as MetaMask, Trust Wallet or Binance DEX and be connected to DeFi applications or platforms such as UniSwap, PancakeSwap with the DApp feature of this wallet.

What is DeFi Token?

DeFi token refers to the tokens in DeFi applications and platforms.

What is DApp?

DApp, short for Decentralized Application, means decentralized application.

What is DeFi Staking?

It is the process of staking assets on the DeFi system. For more detailed information about the staking process, you can read our related content.

What is DeFi Platform?

DeFi platform; UniSwap is an expression for DeFi applications such as PancakeSwap.

What is DeFi Investment?

DeFi investment; Investments in token units or crypto assets through DeFi applications.

Aslıhan Yüksel

Aslihan Yuksel, who works as a manager inleading brands and companies in the business world; As a result of his interest in the crypto world and its markets, he has been interested in cryptocurrencies, markets and developments for a long time and transfers all his knowledge within Binansal.