Vera Larionova on DeFi decentralized finance services

DeFi is a blockchain-based financial service. While Bitcoin is a separate digital currency, DeFi is an entire ecosystem of decentralized financial services: banks, exchanges, trust management and insurance services that operate based on automatic algorithms (smart contracts) with no direct interaction with financial intermediaries.

In the traditional world, opening a bank account requires a visit to the bank, collecting documents, undergoing KYC (know your customer) and waiting for approval. In the DeFi system, one can simply connect a wallet to such a decentralized bank (e.g., Aave or Compound) and then move straight to depositing their funds at interest or getting a loan.

On the other hand, lack of verification does not allow such services to «hand out» loans to anyone, and therefore any loan in DeFi is granted exclusively on security of other cryptocurrencies, usually in the amount of 150–200% of the loan amount, especially if such volatile assets as Bitcoin or Ether are used as collateral.

DeFi makes finances more affordable:

• one can get interest on deposits higher than in a bank (but it is not guaranteed and depends on market conditions);
• borrow against crypto-assets to raise short-term liquidity;
• invest without intermediaries;
• DeFi is open 24/7 without weekends and holidays.

However, DeFi is not perfect. One of the risks is hacks. If there are bugs in the code, attackers can steal money, and this has already happened in 2022, when cybercriminals attacked the Horizon blockchain bridge running on the Harmony network and stole about $100 mln.

For now, it is a young and developing technology. Developers are working on security, and perhaps in 10 years DeFi will become as common as online banking.