crypto blog
Community Verified icon

What do we talk about when we do Decentralized Finance or Decentralized Finance? The creation of new financial and usability paradigms of cryptocurrency technology has a lot to do with the term DeFi, an increasingly widespread trend that you need to know if you have been interested in the Blockchain sector for a long time. Are you accompanying us in an essential post for any lover of finances? Keep reading!

DeFi refers to a system whereby software written on blockchains makes it possible for buyers, sellers, lenders and borrowers to interact among peers or with a strictly software-based intermediary rather than with a company or institution facilitating a transaction.

Advantages of decentralized finance

They allow access to financial services by millions of people who do not have assets in the bank, an opportunity for those who want to have financial freedom and who have not been able to enjoy these services.

It develops a new point of economic diversification and development since they have great potential in cryptocurrencies such as Bitcoin. It facilitates the international financing of companies. They adjust to the needs of a target audience to bring development and investments anywhere in the world safely. Disadvantages of decentralized finance Security continues to be a subject of debate within DeFi platforms. Blockchain seems to have proven to be a secure technology but there are still loose ends on security in Smart Contracts.

Cryptocurrencies can be volatile, even though DeFi platforms have created secure operating mechanisms. This could be insufficient and the entire ecosystem may not be protected from possible fluctuations. How does decentralized finance work? Multiple technologies and protocols are used to achieve the goal of decentralization. For example, a decentralized system can consist of a combination of open source technologies, Blockchain, and software. In this part, Smart Contracts, which automate the terms of the agreement between buyers and sellers or lenders and borrowers, make these financial products possible. Regardless of the technology or platform used, DeFi systems are designed to eliminate intermediaries between the transacting parties.

Characteristics of Decentralized Finance

  • Decentralized finance aims to use technology to eliminate intermediaries between parties in a financial transaction.
  • DeFi’s components are stable currencies, use cases and a software stack that enables application development.
  • It works based on Blockchain technology and Smart Contracts.
  • They are secure platforms as they use cryptographic techniques to ensure that only authorized persons can access.
  • They have high levels of decentralization, which means that there is no need for a bureaucratic chain to be imposed over the platform’s functions.
  • They are transparent. Since they are built on free software, every line of code of the platforms is auditable.
  • No limits or boundaries. Access to a platform of this type has no borders, so this service can be used without any inconvenience from anywhere in the world.

DeFi applications give users greater control over their money through personal wallets and commercial services that cater explicitly to individual users rather than institutions.

What are the components of DeFi

At a broad level, the components of DeFi are the same as those of today’s financial ecosystems, meaning that they require stable currencies.
DeFi components take the form of stable currencies and services such as crypto exchanges and lending services.

Smart Contracts provide the framework for the operation of DeFi applications because they encode the terms and activities necessary for the operation of these services.
For example, a smart contract code has a specific code that sets out the exact terms and conditions of a loan between individuals. If certain terms or conditions are not met, the collateral could be liquidated. All of this is done through a specific code rather than manually by a bank or other institution.

Layer 0: this layer is so named because it is the foundation on which other DeFi transactions are built. It consists of a public blockchain and its native digital currency or cryptocurrency. Transactions occurring in DeFi applications are settled using this currency, which may or may not be traded on public exchanges. An example of a settlement layer is Ethereum and its native ether token (ETH), which is traded on crypto exchanges. This layer can also have tokenized versions of assets, such as the U.S. dollar, or tokens that are digital representations of real-world assets. For example, a real estate token could represent ownership of a parcel of land.

Software protocol layer: Software protocols are standards for governing specific tasks or activities. In parallel with institutions, this would be a set of principles and rules that all participants in a given industry have agreed to follow as a prerequisite for operating in the industry. An example of a DeFi protocol is Synthetix, a derivatives trading protocol on


Application layer: as the name implies, the application layer is where consumer-facing applications reside. The most common applications in the cryptocurrency ecosystem, such as decentralized cryptocurrency exchanges and lending services, reside in this layer.

Aggregation layer: The aggregation layer consists of aggregators that connect various applications from the previous layer to provide a service to investors. Lending, banking services and crypto wallets are an example of an existing service in this layer.

DeFi Ecosystem

Today there are more and more DeFi platforms. Bitcoin and Etherum are two of the most important examples, as these two projects alone make up 70% of cryptocurrency capitalization. Here are some of the DeFi tools that make up the ecosystem of decentralized finance – don’t miss out!


Bisq is a P2P exchange protocol built especially for Bitcoin and completely decentralized.


RSK is a protocol and set of services identified as RIF OS, a complete development platform that includes smart contracts, digital identity, decentralized storage, instant payments, cross-chains bridges, integrated payment system, decentralized communications, and decentralized marketplace generation.


0x is a protocol for building decentralized P2P exchanges running on Ethereum.


Bancor is a token exchange system built on Ethereum.


Compound, is an investment pooling protocol with lending options, yield farming, liqidity mining that has taken great relevance during 2020 to the point of displacing MakerDAO as the highest value DeFi by two weeks.


Kyber, a swap protocol for integrating exchange functionalities in applications with cross-chain operations.


No responses yet

Leave a Reply

Your email address will not be published.