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What is DeFi and how do they work?

How does decentralized finance work?

While Bitcoin was created to decentralize money, DeFi aims to decentralize financial services . Both coexist in the same universe: the Blockchain.

But what is DeFi? DeFi is the acronym for “Decentralized Finance”. In Portuguese, “decentralized finance”. DeFi is a protocol that seeks to remove intermediaries from financial transactions — whether banks or cryptocurrency brokers themselves.

That’s because most DeFi projects are open source, open source, and not dependent on any one company. That’s why the projects don’t originate in a specific region either, but are very guided by the communities. Transactions are “peer to peer”, person to person.


Loans, mortgages, investments… There are many financial services that can be performed in a DeFi ecosystem. Common cryptocurrencies — most often the Ethereum — or stablecoins can be used. Stablecoins are digital coins whose value is linked to traditional coins.


DeFi protocols often have foundations and supporting institutes to enable “self-governance”. In order to have voting power, users purchase specific, governance tokens .

“These are small amounts. In these discussions, the interest rate, which assets the platform accepts, among others are decided”, explains Laender in an interview with StartSe. Once you have these particulars decided, the service becomes scalable from an engaged community.




Blockchain has become known for being the trading platform for cryptocurrencies, but it has several use cases (Photo: Getty Images)

The blockchain, the currencies used and even the rules vary according to each DeFi protocol. There are, however, good practices and the most used platforms and currencies. The Ethereum Blockchain is usually chosen as it allows the creation of smart contracts.

Currently, Ethereum is the second most traded cryptocurrency in the world, just behind Bitcoin. The currency grew due to the possibility of easier recording of information, transactions, among others. While Bitcoin is still bringing these facilities to its platform, Ethereum was already created with these possibilities.


Cryptocurrency and blockchain technology is generally secure. However, scams happen frequently , as it is still a new market and there is a general lack of public awareness – especially when we talk about new users.

As it is a decentralized protocol, often not even containing a broker, the user must be even more attentive. “If there is a technical or human failure, there is no 0800 that the customer can call and solve the problem quickly. If you deposited the wrong token, you could lose it”, says the specialist.

Anyone who wants to enter this market must study it carefully. “Look for communities on YouTube or Twitter; are two easier sources to deal with. The books, unfortunately, are already out of date in stores”, comments Laender. One factor that could be a barrier is that most content is still available in English.



Open Banking is an initiative that also aims to decentralize the financial market, but it works completely differently from DeFi (Photo: Getty Images)

Due to the proposal to decentralize the financial system, it is common to think of a similarity between Open Banking and DeFi. The similarities, however, end there. This is because, in the first option, customers continue to rely on banks, fintechs and other financial institutions as intermediaries in transactions.

In the second option, customers can use financial services without being tied to a company, in addition to having blockchain protocols, cryptocurrencies, among others. There are, however, limitations to the services being offered so far and greater suspicions about security.


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