We have mentioned the decentralized finance system - DeFi, talking about the trading metaverse - Metafi (http://www.inmost.pro/blog/metafi-first-social-trading-metaverse/). 

As one of the hottest topics in the crypto world over the last few years, Defi is definitely worth a closer look.

DeFi is a global blockchain-based financial system built to meet the needs of the new Internet iteration - Web-3. It is an alternative to tightly controlled traditional systems with outdated infrastructure and processes. It allows you to control and have direct access to your money. DeFi eliminates the fees that banks and other financial institutions charge for using their services. People store money in a secure digital wallet and funds transfer takes only a few minutes. It also provides access to global markets and creates alternatives to local currency or banking solutions. Any traditional services provided by financial institutions can be expected to be offered through DeFi. 

While not everyone has the ability to open a bank account and use traditional financial services, anyone with access to the Internet can use services offered by DeFi products. Currently, tens of billions dollars in cryptocurrencies have flowed through DeFi programs, and the number of transactions is increasing every day.

DeFi markets are always open and there is no centralized authority limiting their working time, blocking payments or denying access. This decentralization aspect is considered to be one of the main advantages of DeFi.

To provide services without third parties, DeFi uses cryptocurrencies and smart contracts, transferring trust from intermediaries to machine algorithms.

A smart contract is a self-executing contract where the terms and conditions are defined and applied through automation and approved autonomously and efficiently on the blockchain. No one will be able to change a smart contract once it is launched: it will always work as programmed. Smart contracts are public, so anyone can view and monitor them. This means that the community will be able to quickly detect a compromised contract and react accordingly.

Security, privacy and transparency of DeFi services also base on fundamental advantages of blockchain as the records of information in chain blocks cannot be changed or controlled by any authority.

Even though most DeFi services are now built on Ethereum, Bitcoin was the real DeFi pioneer, giving the ability to own, control, and send assets anywhere in the world. Bitcoin is open to everyone and no one can change the rules. Its concepts really differ from the traditional financial world, where governments can print money and devalue your savings, and companies can shut down markets.

Now, Ethereum is the ideal foundation for DeFi. Most of DeFi products are actually powered by Ethereum. Therefore, many of them can be easily configured for interaction. You can borrow tokens on one platform, and exchange them on another market and in a completely different program. Tokens and cryptocurrency are written into the Ethereum blockchain, and a shared ledger that tracks transactions and ownership is one of Ethereum's unique features.

Like every other system DeFi is composed of different parts. Its infrastructure consists of layers that are responsible for various processes and guarantee the smooth functioning of transactions and contracts:

  1. Settlement Layer: also called Layer 0. Based on Ethereum blockchain it serves as a foundation for all DeFi transactions, writing code or building applications. This is the vital component - the DeFi system can not exist without blockchain.

  2. Protocol Layer: defines rules and standards for all DeFi transactions, it is a description of the specific conditions necessary for the code to run accurately and fulfill its tasks. All the protocols are interoperable and can be used to create any application in the DeFi ecosystem.

  3. Application Layer: consists of decentralized applications or dApps - products created on the basis of two previous layers that serve as a kind of front-end in the DeFi ecosystem, enabling consumers to use DeFi services. With dApps you can buy, sell, trade, lend, and borrow cryptocurrencies on a decentralized network.

  4. Aggregation Layer: at this layer third-party vendors create end-to-end solutions by bringing together existing decentralized applications and offering users and investors a wide range of financial services in one place.


The list of DeFi services is constantly growing, here are some of them:

  • Money transactions around the world

  • Access to stable currencies

  • Loans

  • Deposits

  • Trading

  • Investments

  • Insurance

However, despite the great financial freedom offered to users, serious challenges regarding DeFi still exist. For example, a lack of consumer protection. DeFi is free of rules and regulations. But it means that users often have no legal protection if something goes wrong. There are no government reimbursement systems for DeFi and no laws requiring capital reserves for DeFi service providers.

The problem  is that all the rules and restrictions which could potentially protect the user do not apply to the decentralization concept. So, the path forward may be unclear, but it will certainly be important for DeFi investors to monitor the evolution of the regulatory environment for this new financial sector.

Despite all the concerns and the so far insufficient resistance to hacker attacks, DeFi would gradually break the monopoly of traditional financial institutions and decrease the cost of traditional financial services by removing barriers and giving everyone equal access to the financial infrastructure.



Request high-level consultation in one click
Contact us