WHAT IS DEFI?

Starting with a brief introduction: Decentralized Finance (DeFi) is an ecosystem of applications and users designed to mediate transactions and communications, where the applications run on blockchain networks which are resilient to destruction and largely immune to judicial control otherwise than by obtaining control over users and their private keys.

DeFi often replaces fees that banks and other financial companies charge for using their services, depending on the underlying blockchain system, and these fees are unpredictable and can sometimes be higher than the fees that banks charge.

Anyone can have money in their digital wallet which offers a lot of security, being able to transfer their funds in seconds or minutes to anyone anywhere in the world, the only disadvantage is that to make transactions you need to be connected to the internet.

Differences From the Traditional Financial System

No Intermediaries: When we state that DeFi operates without "third parties" or "intermediaries," we refer to those in the traditional system, such as banks or centralized financial institutions.
The developers of Blockchain and smart contracts can be considered the intermediaries, however their functions are different from those of traditional system, their function is to create and maintain the codes, smart contracts and protocols that make up the DeFi system.

Accessible: DeFi is accessible to anyone anywhere in the world as long as they have access to the internet, creating greater financial inclusion for any individual and giving the possibility for anyone to have their individual wallet.

Transparency: All transactions are recorded on the blockchain, which results in greater transparency and immutability of records, but its important to mention that in many cryptocurrencies, especially on public blockchains like Bitcoin, transactions are pseudonymous, meaning that wallet addresses are not directly linked to users' real identity.
However, the level of identity exposure can depend on how users manage their transactions and whether their identities are at some point associated with a specific address.

If, for example, you use an exchange to buy or sell cryptocurrencies, that exchange may be subject to regulations and compliance policies, which may involve the collection of personally identifiable information. If the exchange is asked to disclose this information, it may be linked to the specific transactions carried out by you.

Ownership of assets: Users have complete control over their assets, unlike the traditional system, where assets are often held by intermediaries.

Financial Programmability: DeFi enables the creation of highly programmable, personalized, and automated financial products through smart contracts, such as Dapps, creation of new tokens, creation of new blockchains, new layers, and new protocols.

Rewards and Interest: Participants can receive more attractive rewards and interest by lending or providing liquidity compared to traditional options.

Challenges:

Market Volatility and Risks: Digital assets can be volatile, posing significant risks to participants, they can have large returns or significant losses.

Regulatory Challenges: Ever-evolving regulation can create uncertainty for DeFi participants.

Safety: Challenges around cyber security and flaws in smart contracts require attention from users, but there is always a way to minimize this risk, even if it is by making more thoughtful decisions and paying attention to which projects or links we are entering, whether they are reliable or not and whether they have a good background or not.

How Can DeFi Impact Financial Inclusion Globally?

• DeFi operates on the internet and is accessible to anyone with a connection to it (note that to maintain the wallet you don't need internet, only to download it and make transactions), providing financial services to remote regions and populations that historically do not have access to traditional financial institutions.

• The fact that it does not have any kind of geographical barriers and gives access to make transactions anywhere in the world.

• The fact that there is an absence of traditional intermediaries can make fees and costs lower, anyway you should always be careful, because as mentioned before the fees can vary and be higher, always pay attention when you make transactions and always find out where you may have lower fees.

• DeFi allows for lending and microfinance without the need for traditional collateral, which can benefit small entrepreneurs and unbanked communities, here are some examples of defi platforms that offer lending (Compound, Aave, MakerDAO, among others)

• Traditional assets, such as property or commodities, can be tokenized, making them more divisible and accessible to investors of any size.

• Rewards and Staking programs are also quite beneficial as people can earn rewards and interest for participating in DeFi protocols, incentivizing active participation and use of financial services.

• In regions where fiat currency can be unstable, the cryptocurrencies and digital assets used in DeFi can offer a form of protection against inflation.

• Finally, and the part that fascinates and challenges me the most on a daily basis is the fact that it contributes a lot to financial education, encouraging users to better understand how it works and how to have more control over their finances, despite the simplicity and flexibility that it brings there is a lot to learn in this world, the more we explore the less we know and the fact that it is in constant development and bringing new projects arouses curiosity, what leads to inclusion and communities creation.

What Are the Biggest Challenges to DeFi Growth?

I would say that integration with traditional services and institutional adoption at this time, among many, is the biggest challenge we face, as the structural and regulatory differences that both parties have bring a huge dichotomy between them and constant challenges for those who are on the DeFi side.
Not wanting to be too critical of the traditional system, I think it is unanimous among everyone that the traditional system seeks power and control and knowing that there is a decentralized entity to which they do not have full control makes them not very adept at this system, even though they know that it can be beneficial.
So the solution may be to find a common ground between both parties, in a way that don't harm the objective, mission and vision of the creation of DeFi.

Secondly, and it ends up integrating with the first thing I talked about, is the lack of clarity in regulations, because it can create an uncertain environment for DeFi projects and users, making it difficult for businesses and investors to understand and comply with regulatory obligations.

Thirdly, security and cyber risks, as attacks on platforms and failures in smart contracts can lead to significant or total losses of funds, which means that security should be a priority and be constantly developing.

There are more challenges, which I will certainly talk about in the future, and there will certainly be new challenges, and that turns out to be interesting, but for me at the moment these are the 3 main challenges to combat.

How Is Security Approached in the DeFi Ecosystem?

Security is a key concern in the DeFi ecosystem, given the decentralized and automated nature of the protocols and smart contracts involved, but despite security being a key concern it is important to realize that no system is risk-free, as the DeFi ecosystem is constantly evolving, and as it evolves, security should increase as well.

As I mentioned earlier, the fact that the DeFi ecosystem is constantly evolving also means that users have to keep up-to-date. In this environment, and fortunately the communities collaborate with each other, one of the important factors is education, and I speak from a personal point of view, because by keeping myself informed about new protocols and new safety standards I always have less risks, and fortunately we have open communities where we have all the information we need.

Here are some common security practices and concerns related to smart contracts and DeFi protocols:

Smart Contract Audits:

• Before being deployed, DeFi smart contracts often undergo security audits conducted by companies that specialize in code analysis.

• These audits seek to identify potential vulnerabilities, bugs, or security flaws that could be exploited by hackers.

Security Tests:

• Developers perform extensive security testing on smart contracts to ensure that all functionality behaves as expected.

• Penetration testing and other methods are used to simulate attacks and identify potential weaknesses.

Governance and Updates:

• Decentralized governance systems allow the community to make decisions about updates and changes to protocols.

• However, it is essential to balance governance with stability, avoiding vulnerabilities that may arise from poorly designed updates.

What is the Future of DeFi?

The future of Decentralized Finance is a dynamic and ever-evolving field, with several trends and potential developments that could shape its path in the coming years.

At the moment DeFi is the best alternative that exists to the traditional system, and it has already proven that it is effective and brings benefits to everyone, but its evolution and development will depend on many factors, such as:

Integration with Traditional Finance- Having an integration with the traditional system can make it easier for a wider audience to enter and convince the masses that they can trust DeFi.

Scale Solutions- Successful development and implementation of scaling solutions can alleviate scalability issues while improving efficiency and reducing transaction costs.

Cooperation- Projects that facilitate cooperation between different blockchains can gain prominence, allowing even more collaboration between ecosystems and a more fluid transfer of assets.

Sustainable development- Concern for environmental sustainability can drive the adoption of more eco-friendly technologies, influencing protocol choices and consensus algorithms.

Maturity of Governance Structures- Decentralized governance structures, such as DAOs (Decentralized Autonomous Organizations), can become more mature, allowing for more meaningful community participation in protocol decisions, the alternatives that are currently being discussed, are the creation of DO (Decentralized Organizations) or DHO (Decentralized Human Organizations).

In a DHO, blockchain technology and decentralization principles can be used to eliminate intermediaries, ensure transparency, and allow for active participation by members.

To conclude, the constant development and improvement of security, regulations, and education are also important factors for the future of DeFi, and at this time they are seen as a priority by communities, so I believe that the future of DeFi is very promising, but cooperation between communities and overcoming challenges has to be seen as a means to an end. It is up to each individual to believe in and have a vision of a sustainable future, prosperity and trust.