In the financial systems we are used to, the intermediation of banks and financial institutions is needed to hold money, borrow capital, earn interest and perform other financial transactions. Banks and financial institutions can freeze assets; working hours and cash reserves are determined. They have power over their clients' funds. This traditional order is characterized as “centralized finance” (CeFi- centralized finance).
Blockchain is based on the idea that individuals and institutions can directly transact with each other, instead of intermediaries such as traditional banks or stock exchanges. After the first blockchain, Bitcoin, with the establishment and widespread use of the Ethereum blockchain, the decentralization of financial systems based on centralized structures and therefore intermediaries has come to the fore. In the Decentralized Finance (DeFi) approach, people and institutions that make financial transactions do not need to trust that the intermediaries will act honestly. In DeFi systems, computer software replaces the intermediaries and thus a peer-to-peer financial system is established. , they have the financial freedom to choose how they invest without having to rely on an intermediary, so DeFi allows individuals to have more control over their assets compared to traditional financial systems.
DeFi is actually an umbrella concept that refers to the sum of financial applications and projects in the blockchain. Borrowing and lending or exchanging financial instruments can be done easily and quickly with decentralized applications (dApps) that are part of DeFi. Many DeFi applications today run on the Ethereum blockchain. However, over time, faster, safer and less costly alternative open networks have emerged.
In traditional financial systems, due to the complex network of banks and financial intermediaries, payment transactions can take days to complete. With DeFi, the transaction time can be reduced as well as the transaction costs. It is observed that the transformation of traditional financial systems with digitalization has begun to change the way many sectors such as banking and finance, health, supply chain and insurance work. Indeed, decentralized finance applications seem to dominate the future of finance. Since 2016, DeFi has become an ecosystem of applications and protocols involving millions of users. As of April 2022, $239 billion worth of assets are in the DeFi ecosystem. Organizations that provide cryptocurrency trading and custody services are trying to gain a place in the DeFi ecosystem.
Tokens, which we often begin to hear in the news or in the markets, can be thought of as a subset of digital assets. Unlike other digital assets, when it comes to tokens, cryptography is used to protect digital data, and distributed ledger technology is used to record transactions.
Token (coin/token) was actually a concept in our lives before the blockchain. In fact, valuable paper or bill of lading is also a “token” in nature. In the case of bills of lading or negotiable instruments, the transfer of the token also ensures that the underlying asset of the token is transferred. So traditionally tokens are proof of ownership of the asset.
In recent years, tokens are computer codes created and managed with blockchain technology. Rights, assets and objects are represented by tokens on the blockchain. It is possible for a digital or real-world asset to be represented on the blockchain by tokens and thus electronically exchanged and stored between blockchain users.
Let's briefly touch on the difference between tokens and coins, which we have started to hear frequently in daily life: coins have their own blockchains. For example, the coin of the Bitcoin blockchain is BTC; The coin of the Ethereum blockchain is ETH. Token, on the other hand, refers to digital assets that are embedded, running on another blockchain. Creating tokens is easier and faster. NFTs, which have come to the fore with the sale of digital artworks or collectibles for astronomical figures since the beginning of 2021, are also tokens. Chainlink (LINK), USD Coin (USDC), and Uniswap (UNI) are some of the most traded tokens using the Ethereum blockchain.
The concept of tokenization has started to become a global trend in the field of financial technologies. The types of assets that can be tokenized in the DeFi ecosystem are diverse: from artworks to sports teams, from financial products to real estate, many assets can be converted into a token. Fiat currencies can be tokenized as stablecoins or central bank digital currencies (Central Bank Digital Currency-CBDC). Commodities, brands, copyright, patent can also be tokenized. It is also possible to convert collections of unique objects into tokens.
All people who have an internet connection with DeFi and tokenization, wherever they are in the world; It may purchase, trade or store assets without submitting them to a brokerage house, lawyer, bank or other institutions and organizations for inspection or approval. For example, a person anywhere in the world can access the DeFi real estate platform, make transactions to sell the real estate they tokenized. In this framework, tokenization has a wide range of applications in the DeFi ecosystem.
Investment portfolios are easier to manage using a crypto wallet with tokens than using traditional paper certificates. With tokenized assets, transactions can be made faster with less transaction costs, without getting stuck in administrative procedures. In addition, traceability and transparency of assets are ensured through tokenization. The history of tokenized assets cannot be changed, as transactions are irrevocably recorded on the underlying blockchain infrastructure. Thus, investors can access the transaction history up-to-date and make more informed decisions.
In addition, the blockchain allows assets to be segmented and investors can own and trade only a portion of the asset. Thus, barriers to investment are reduced and it becomes more accessible to many more people. Lowering the minimum investment threshold under DeFi allows small investors to diversify their portfolios and enter privileged markets that were previously reserved for institutional investors only.