The new finances: What are DeFIs?

First of all, at this time, respect difficult times and our best wishes for you and your loved ones. Times of crisis give rise to opportunities.

We have been in blockchain for a while seeing how everything that surrounds the DeFIs has great relevance and, in a few months, they have moved on to a few billion euros. The intention of this post is to explain a little about this ecosystem and in future installments we will delve into each of the points.

Basically they are Decentralized Finance, that is, a pre-established protocol that allows you to lend and request money without intermediaries and on open source platforms, among many other things.

Since the birth of Bitcoin in the middle of the debt crisis of the global financial and banking sector, with a totally different philosophy than that of the issuance of state currencies, until now that we find ourselves in another possible recession aggravated by the effect of the Coronavirus. We see again how states print more and more money without any kind of transparency and the same organizations continue to make decisions, creating mistrust among citizens.

Therefore, we prefer to rely on technology: programmable money, which operates under public standards that we can all see and understand.

What problems do we solve using blockchain and decentralized finance?

If we want to send or receive an international payment (which happens to us sometimes with the Cladding Prices project), we need several banks that charge their corresponding fee, and a few days of delay.

Using blockchain we can use cryptocurrency payments, especially stable ones if they are commercial relationships, to send money from one site to another in a few minutes and with almost no fee.

The transparency of the banks leaves much to be desired. Few know in depth how a bank or the body in charge of issuing the currency really works.

With blockchain we get all users, all over the world, the same public record where we can see the exchange of money.

The centralization of banks. They are governed by people or entities with their own interests.

Technology allows us to use decentralized services that do not attend to any censorship or subjective decision of their members in their operation.

Those unbanked are counted by hundreds of millions of people in the world.

Technology allows that from any device with internet you can be part of the financial system, even ask for or lend money.

With all these characteristics we see the importance of the DeFI world (decentralized finance) where anyone can access an online service, decentralized, without intermediaries, low in costs to ask for or lend money.

Thanks to the large number of stable currencies we can better control our digital finances, and these assets are the main part of the system.

How does it work?

There are already several platforms where you can lend or borrow money. They all have their similarities and differences, we prefer to use AAVE for different reasons. You can loan money and earn a return on the second.

Being a lender can be a great option in this system but for it to work we need borrowers, so how does the system assure me that someone I don’t know is going to pay me my money?

To access a loan you have to show collateral, that is, if I want 150 coins, for example, I must block 300.

What is the point of it?

More than you can imagine, apart from accessing instant money by choosing if you want the variable or fixed commission over time, you can use it for different scenarios. One of the most valuable is for traders.

An example: I block 1 ETH at a value of € 100 and they give me 50 DAIs (stable currency 1 DAIs equals approx. $ 1).

If with those 50 DAIs I invest it well and the market rises we can find ourselves in the following scenario.

1 ETH already has a value of € 120 and I have the exchange in the currency that I have invested 100 DAIs. I can close the loan by paying the 50 DAIs I owed and regaining access to my ETH.

What if you don’t pay?

You will respond with your collateral and will have a penalty for it. You will continue to collect. Everything under a pre-established protocol. Some imposed rules, explained.