Imagine a world where you don't have to go to banks to get your loans approved, a world where you don't need to be burdened by heavy transaction fees, a world where finance will not be controlled by any central authority.

And that world is no longer just a dream.

The dream that we are talking about has turned into reality by DeFi aka decentralized finance.

Before understanding DeFi, we need to understand CeFi or centralized finance. Centralized finance is the current system with the presence of financial bodies, where finance is controlled by central authorities (banks and governments). They make all the decisions - who should have the money and who should not, who should be able to use it, and how should they be able to use it.

DeFi is just the opposite. The whole system of finance runs on codes, algorithms, and smart contracts with no central authority to bias or control it. Hence, it is much more accessible and fair to all.

To understand Defi, you need to understand its 4 pillars.

Pillar 1 - Stablecoins

At this point, it must be clear to you that DeFi has been made possible only because of cryptocurrency and the different concepts that followed it. Stablecoins are a special type of cryptocurrency, having a stable value, i.e., they are less volatile. These coins are usually pegged to some real-world fiat currencies. Ex DAI, USDT, USDC. So what is its significance?

Well, let's take an example.

You have some Ethereum in your Crypto wallet. When its value goes up, you sell it and the money comes into your bank account. When its value goes down, you transfer money from your bank account and buy some. The entire procedure seems time-consuming, requiring different fees and taxes. What if this could be avoided?

Taking the same example, with the use case of Stablecoins. When the value of Ethereum goes up, you sell it for some USDT (Tether token) and when the price falls, you can re-invest. In this process, your money was safe and stable and you were able to avoid all the disadvantages that you had before.

Pillar 2 - Lending and borrowing

Let's take another example.

You have 1 Ethereum worth $1000. You need the money but you don't want to sell your crypto. You can borrow the money you need, using your Ethereum as collateral, with the help of AAVE, a DeFi based model of borrowing and lending. On doing this, you get $800 worth of USDT. Now, after a period of time, say you were able to increase the $800 to $850 and you want your Ethereum back. You could get it by returning the $800, making a profit and if during this time period, the price of Ethereum rose to $1500, you would have made another $500 in profit without even owning the Ethereum completely.

However, if the same $800 dollars that you got by keeping $1000 worth of Ethereum as collateral came down to $750, you would have 2 options. Either give an extra $50 from your own pocket to get back your Ethereum or keep your $750 and lose the Ethereum.

This is the beauty of DeFi. It is a win-win situation for both, the investor and the platform.

Pillar 3 - Decentralized exchanges

Centralized exchanges like Coinbase, have very few coins as they have to be cautious about the working of the cryptocurrencies before listing them. Hence, they end up (kind of) censoring the projects which they do not believe in. DeFi has led to the rise of decentralized crypto exchanges like Uniswap, which do not need to comply with all the rigorous laws of their government, they operate under no government regulations, and there are thousands of cryptocurrencies listed on them.

Pillar 4 - Insurance

Decentralized insurance is something unique. The usual centralized form of insurance involves a lot of paperwork, thousands of conditions, centralized bodies which may discriminate, and you may even end up not getting what you were promised.