From previous lessons, you already know that DeFi stands for Decentralized Finance. It refers to financial systems and applications built on blockchain technology, operating without the oversight of external institutions or third parties. Its opposite is CeFi (Centralized Finance), where transactions are controlled by banks or centralized cryptocurrency exchanges.
Advantages and Disadvantages of DeFi:
Like any technology, decentralized finance has its strengths and weaknesses. While DeFi is often presented as a revolutionary shift in finance, it is not without its flaws.
Advantages:
- Full control over your funds – users manage their assets without intermediaries.
- Lower transaction costs thanks to the peer-to-peer model.
- Resilience to failures – built on blockchain, ensuring stability.
- Transparency – DeFi code is open-source, allowing anyone to review it.
- 24/7 availability – all you need is an internet connection.
- No censorship – users decide how to spend their money without institutional interference.
- Anonymity – transactions do not require personal data.
- Smart contracts can be reviewed for added security.
- Protection against fraud – blockchain ensures transaction immutability and transparency.
Disadvantages:
- Bugs and limited optimization – the sector is still in its early development stages.
- Slower transaction speed – blockchain’s complexity makes DeFi slower than traditional financial systems.
- Risk of hacking attacks – public code may contain vulnerabilities that hackers can exploit.
- Irreversible transactions – once funds are sent, they cannot be recovered.
- No institutional oversight – users bear full responsibility for their actions.
- Complex terminology – newcomers need to understand many technical terms before using DeFi.
DeFi vs traditional finance
DeFi represents a new financial paradigm, eliminating intermediaries and offering solutions different from traditional banking. The goal is greater accessibility, no censorship, and financial transparency.
DeFi offers almost the same services as traditional finance: loans, credit, savings, and currency exchange. The key difference is that transactions in decentralized finance are anonymous, transparent, faster, and cheaper.
Structure of DeFi
The DeFi ecosystem consists of four main layers:
- Settlement layer (Layer 0) – includes blockchain and cryptocurrencies, serving as the foundation for all transactions.
- Protocols – a set of rules and standards that enable DeFi applications to function.
- Applications – financial services used by users, such as decentralized exchanges (DEXs) or lending platforms.
- Aggregation – integrating various applications to facilitate fund transfers and maximize profits.
Most popular DeFi services
Lending and borrowing
Blockchain-based platforms allow users to borrow and lend funds without intermediaries. By connecting their crypto wallets, users can access smart contracts that automate these transactions. Leading platforms in this space include Maker, Compound, and Aave.
Decentralized exchanges (DEXs)
DEXs enable cryptocurrency trading without intermediaries. They operate on a peer-to-peer model, meaning traders exchange assets directly without depositing them on the exchange, reducing the risk of hacks or fund losses. Some of the most popular DEXs include Uniswap, SushiSwap, and PancakeSwap.
Decentralized marketplaces
DeFi allows trading without a central authority. Unlike platforms such as eBay or Allegro, decentralized markets operate on blockchain and are governed by smart contracts. This means users can buy and sell goods and services without intermediaries or additional fees.
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