Have you ever looked at the fees charged by banks, for money transfers, exchanges, loans, or any kind of transaction? Have you ever found yourself giving up on the bureaucracy involved?
The world of decentralised finance
Welcome to decentralized finance also known as DeFi, where users have control over their funds and traditional finance challenges appear to be solved to a large extent. DeFi is here to change the dynamics, by using blockchain technology. Utilizing smart contracts to create financial relationships between parties, DeFi eliminates the need for any kind of intermediaries like a centralized financial institution – a bank or even a court. It is a more accessible financial system that cuts out the middleman, facilitating anything you would use a traditional financial institution for, like high yield savings, trading, borrowing, derivatives, exchanges, and insurance. Advocates claim that it is more secure and transparent, offering faster and more efficient financial deals.
How does it work?

In DeFi financial applications, else projects or protocols, smart contracts play a crucial role. These computer codes contain all the necessary details of an agreement and are designed to execute themselves based on predefined parameters specifying the resolution of every dispute. Blockchain technology facilitates these services, eliminating points of failure. Data transferred are recorded over thousands of nodes. Nodes may be physical or virtual network devices operating as points where a message can be created, received, or transmitted, allowing for excessive safety and security to be achieved. Most DeFi protocols are currently built on Ethereum, one of the first programmable blockchains that can manage smart contracts.
In DeFi financial applications, smart contracts play a crucial role. These computer codes contain all the necessary details of an agreement and are designed to execute themselves based on predefined parameters. By utilizing blockchain technology, these services are made more secure and reliable, as data is recorded across numerous nodes. These nodes can be physical or virtual network devices that enable the creation, reception, and transmission of messages, ensuring enhanced safety. Currently, Ethereum serves as the foundation for most DeFi protocols, being one of the pioneering blockchains capable of handling smart contracts.
To understand the reason behind the fact that DeFi as an ecosystem is gaining popularity, we should take a closer look at its major applications, which include but are not limited to the following:
- Exchanges for trading
- Lending platforms
Centralised Exchanges (CEXs)
There are two types of cryptocurrency exchanges: Centralized (CEXs) and Decentralized exchanges (DEXs).
Centralized exchanges function as a third party between buyers and sellers. Most crypto transactions go through these exchanges.
Examples: Coinbase, GDAX, Kraken etc.
Advantages
Advantages include user-friendliness and convenience by monitoring the account and all transactions through a developed, centralized platform. These exchanges are operated by a legal entity, in the form of a company, offering an extra layer of security and reliability, assuming the provider is trustworthy. Transaction fees are typically cheaper than in DeFi unless transacting on a scaled chain where other kinds of drawbacks exist, like slippage issues.
Disadvantages
There is no privacy and anonymity due to the strict KYC processes that clients need to go through.
Other disadvantages include the risk of hacking, theft, and bankruptcy as these companies hold enormous amounts of Cryptocurrencies. This also stands true for decentralized exchanges where transparency allows for the rapid and effortless identification of any hacking or misallocation of assets.
Decentralised exchanges (DEXs)
Traders and investors can engage in transactions directly with one another through decentralized exchanges. These exchanges operate using automated market maker protocols, allowing individuals to trade with a pool of assets that have been staked by others. This setup ensures liquidity and offers the opportunity to earn interest/yield as a reward.
Examples: Uniswap, Sushiswap, Bancor etc.
Advantages
Those seeking for privacy, anonymity and hassle-free account opening processes, without lengthy KYC processes, have found their “ark” in the form of decentralized exchanges. Here, smart contracts are typically used to automate the execution of an agreement, when predetermined conditions are met. This way all participants become immediately aware of the completion of the transaction, without any intermediary’s involvement such as an exchange, a broker or bank. There is security and reliability in the transaction process, as long as the smart contract provider is trusted when interacting with the chain.
Disadvantages
Operating actions in decentralized exchanges can be more complex compared to centralized exchanges. Users must take responsibility for their wallet keys and passwords. If these credentials are lost, the assets cannot be recovered. Moreover, transactions can be costly, particularly when using Ethereum.
Lending platforms

Traditional credit systems operate on the principle of credit risk, which means that borrowers or counterparties are expected to fulfill their obligations as per the agreed terms. If a borrower fails to consistently adhere to the agreed payment plan, the lender can seize the borrower’s asset to settle the claims, but usually at a lower value. However, this process is time-consuming and affected by inflation and interest.
Understanding the above restrictions, several lending platforms that operate on blockchain technology have emerged. Using open lending protocols, they have managed to transform traditional banking processes. Examples: Aave, Alchemix, Compound etc.
If compared to traditional credit systems that are under-collateralized, DeFi lending platforms are over-collateralized (one needs to stake more than their need to borrow), allowing anyone to borrow or lend Cryptocurrencies. Users can earn interest when loaning their assets (staking). They can also borrow other Cryptocurrencies to reuse them as collateral (rehypothecation) which is a form of leveraged borrowing. In some cases, especially when it comes to newer platforms, one can also get paid to borrow.
In DeFi, users pay for loans with tokens (DeFi assets). This kind of lending does not require the creditor to take actions to hold legal rights on the ownership of physical asset used as collateral, like in conventional lending.
This way, loans can be provided to small and medium-sized businesses, as well as individuals who would not be able to obtain credit under normal conditions (due to their unsuitable credit risk profile from traditional credit institutions). The blockchain-based lending market reduces counterparty risk, resulting in faster, cheaper, and more accessible borrowing and lending opportunities. Trust for the centralised exchange is replaced with the trust to DeFi smart contracts, which might not always be audited. However, insurance protocols are available to offer coverage for smart contracts in such situations.
Concluding
There is no doubt that DeFi is becoming popular, having attracted massive growth. A reason behind this is the immense creative power of DeFi, which allows developers to quickly build financial applications, something that has never been possible in traditional finance.
It opens the way to a smarter, faster, and more cost-effective alternative solution to traditional financing in the 21st century. Rather than relying on intermediaries, DeFi embraces open-source collaboration eliminating lengthy processes and extensive fees, providing anonymity to its users.
Has DeFi gained in popularity? Clearly YES!
Is it going to become the norm? How will big banks react over the fears of its chequered past?
Only time will show.
At FXGT.com, we provide unparalleled trading conditions tailored specifically for experienced traders opting for our PRO account to engage in DeFi token trading. Log in now to embark on your journey with DeFi tokens to diversify and enrich your portfolio today.