Centralized and decentralized finance

In market conditions, the state of the financial system reflects the social, economic and political aspects of the life of the state. Acting as a multi-level structure, it covers the country's resources in the form of monetary funds, different in their purpose. Within this system, a distinction is made between centralized and decentralized finance. Let us consider these categories in more detail below.

Transferring funds

Being in constant motion, finances form corresponding flows that require clear organization. The directions of movement of money connect the elements of the entire system into one whole. Depending on the complexity, multi-, one- and two-way flows are distinguished. In the latter, the movement of money occurs in one direction. For example, funds transferred from the federal budget go to finance the expenses of the Pension Fund. In a two-way flow, money moves back and forth between two elements or a specific link and a sector that does not include it. For example, taxes from companies are transferred to the budget, but if a number of conditions are met, the latter can receive funds back in the form of loans or subsidies. Multilateral flows simultaneously cover different parts of funds and go in different directions. In a household, the budget is formed from income from certain sources. Thus, the head of the family or another member of the family receives a salary at the enterprise, and transfer payments come from the budget. At the same time, subjects pay taxes to extra-budgetary funds and directly to the budget.

Financial organizations

These are monetary relations that are associated with the formation and distribution of monetary income and their use for various purposes. A financial organization uses money from the sale of products - the sale of goods, services and works. If such an organization does not have funds, then loans are usually used to obtain them for a short-term period. If for the long term, then shares and bonds can be issued. And the ratio of loans to equity issues forms the capital structure.

These organizations can decide to invest, that is, generate additional income. They assess risks by analyzing economic factors.

There are three types of financial organizations:

Commercial Bank

They are further divided into three types:

Commercial Bank . This is a credit institution that carries out banking operations for individuals and legal entities.
Investment bank . This type of bank organizes the raising of capital on global financial markets for large companies and governments. He is also an intermediary in the trading of stocks and bonds, and can provide advisory services in the purchase and sale of businesses.
Mortgage bank . Provides mortgage loans and resells mortgage-backed securities.

This division is very arbitrary, because some banks work in all three directions.

Non-bank credit organization

Its types:

Pawnshop . This organization provides short-term loans secured by property.
Insurance Company . It concludes insurance contracts and their maintenance.
Non-state pension fund . It accumulates pension savings and can even invest them with the person’s consent.
Credit cooperative . Specializes in providing financial assistance to members of this organization.

Investment institutions

Its types:

Investment company . Members of such an organization give it the right to manage their investments. So-called investment portfolios are created, where shares of different companies are collected. This allows you to minimize the risk in the event that a company goes bankrupt - then a member of the organization will lose only a minimal amount of money, and in the best case, will receive less income.
Investment fund . Similar to an investment company. There are several types of such funds, including hedge funds and mutual funds.
Stock Exchange . Ensures the regular functioning of the securities market. We will talk about it separately in lesson five, when we study financial analysis.
Investment dealers and brokers . A broker performs intermediary functions on the stock exchange - only he has a license to carry out such transactions. The dealer conducts business on his own behalf and can be an investment or commercial bank.

Centralized and decentralized finance

With the collapse of the USSR, the country's monetary system underwent a number of significant changes. Until 1991, the structure included finance of national importance, non-production and production spheres. The state budget of the USSR directly combined the union monetary system, as well as state republican flows and social insurance funds. The first element accounted for 50-52% of the total volume of monetary resources. 35% of these funds were at the disposal of the republics, and 15% were included in local budgets. Since January 1, 2000, the Industry Code has been in force in the Russian Federation. In accordance with it, funds owned by the state are combined into a budget system - centralized finance. This institution is the most important element of the entire monetary structure. However, there is another key link in the system - decentralized finance and enterprise finance. They underlie the monetary system, since it is in the area of material production that most of the country’s funds are concentrated.

Public funds

Today in Russia there is a three-tier budget system. Centralized funds include budgets:

Federal.
Subjects of the Russian Federation (territories, republics, regions, joint-stock companies, cities of federal significance).
Municipalities.

Budgets provide the financial basis for the management of state and local governments. Each element of the system operates autonomously. This means that the lower budget with its expenses and income is not included in the higher one. Within these units, special funds can be created for a specific purpose or for deductions from certain income and other receipts. Planning of budgetary resources is carried out by drawing up a consolidated budget - a master plan. It combines financial resources from all levels of the system. Due to the latter, structural reform of the economy, the development of technology and science are ensured, production efficiency is increased, and reforms are carried out in the housing and communal services and military industries.

Structure of the financial system

The financial system is a form of organizing monetary relations between all subjects of the reproduction process for the distribution and redistribution of the total social product.

To put it simply, the financial system is the accumulation of monetary income and its subsequent distribution. This can be done by the bank, the state, and even you, because you are also part of the financial system.

You must understand that some things in economics are very easy to explain. Any financial system deals with income and expenses. Always remember these two simple words - it will help you understand many complex things. Just as the financial system deals with income and expenses, in the same way finance itself can be spent or acquired (or temporarily acquired).

The financial system is divided into two types: centralized and decentralized finance.

Next we will look at these two types in more detail, but for now we invite you to solve this case so that you can see how the financial system directly affects you and your decisions.

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Sources of formation

Decentralized finance is formed by distributing the value of GDP and other reserves. The structure of decentralized finance includes:

1. Own funds and equivalents. The first category includes company profits and other savings. Equal funds are considered to be the minimum debt for:

remuneration of employees;
advances from customers for the performance of a certain type of work;
tax and non-tax deductions.

2. Borrowed funds. These include:

budget loans;
commercial loans;
bank loans.

3. Attracted flows (funds from other economic entities) - external investments and share contributions.

4. Resources that are received through redistribution in the insurance and financial markets from the budget by higher-level organizations.

The principle of decentralization in projects: how to make money

Stable earnings on DeFi - receiving interest on your deposit. There are other types of earnings, as well as ways to secure investments:

Portfolio management. On the TokenSets platform you can buy tokens (sets) tied to the chosen strategy. The set is provided with a set of cryptocurrencies that are automatically rebalanced within the chosen strategy.
Lottery. Tickets costing 1 bet are purchased on the PoolTogether platform. The more tickets a user has, the higher the chances. There is a weekly DAI pool lottery and daily USDC.
Payments. There are platforms for micropayments. Based on them, you can consult online.
Insurance. Smart contract codes may be imperfect, which can lead to losses. There are platforms that provide insurance for any smart contracts for any period of time.

Distribution of funds

The order in which decentralized finances are managed is of great importance for the stable functioning of the institution. It involves the development of specific programs and identification of the most promising areas for the distribution of funds. Resources can be used for:

Repayment of borrowed funds, payment of interest rates.
Fulfillment of financial obligations established by law.
Covering expenses related to the expansion of production (increase in working and fixed capital, investments related to technological re-equipment, modernization, reconstruction).

Independence of subjects

In modern conditions, domestic companies operating on the market have the right to independently direct decentralized finance. This relative independence allows firms to:

Rationally and most profitably distribute profits from the sale of your products.
Dispose of income at your own discretion.
Form social and production funds.
Find the funds they need to implement investment programs, using, among other things, external resources (bank loans, certificates of deposit, bonds, issues and other instruments).

Decentralized finance of organizations provides the necessary funds to the production sector of the economy. The main goal of commercial firms is profit. Only with its continuous receipt can mandatory and voluntary payments, investment, payment of wages and other necessary measures be carried out to ensure an increase in the level of well-being of society.

Households

Decentralized finance is formed, among other things, from the personal funds of the population. Household monetary resources occupy a special place in the institution under consideration. These flows are of exceptional importance in the creation of income tax and GDP. Decentralized finance also participates in the process of regulating effective demand in the country. A certain share of the generated GDP in the form of services and goods passes through family budgets. The higher the income of the population, the correspondingly higher the demand for produced material assets. This, in turn, ensures a stable economic condition for the producers themselves.

Finance functions

Cash performs such special functions as:

formative;
controlling;
regulatory;
stabilization;
fiscal;
stimulating.

The distribution function refers to the dissolution of the country’s GDP for the subsequent formation of state budgets of different levels.

The controlling function of money makes it possible to monitor cash flows, as well as the expenditure of treasury money on mandatory needs (health care, construction of sports facilities).

Through the regulatory function, the influence is exerted on segments of economic relations through taxes and the issuance of government loans.

The stabilizing function provides the country's citizens with the necessary conditions for the formation of social, cultural and economic freedom.

Fiscal and incentive functions are aimed at combating inflation and other regressive factors of the economy, such as stagnation, denomination, and so on.

Summary balance

The entire financial system and its resources are reflected in the income side of the statements. It should be noted, however, that the consolidated balance sheet does not cover all of the country's monetary reserves. Only centralized finances are fully included - funds from budgets and extra-budgetary funds. As for other resources, they are represented only by depreciation charges and profit. The consolidated balance sheet does not include proceeds from insurance payments, borrowed funds, savings and household income, attracted investments, and deductions from penalties. In accordance with indicative data, the share of centralized funds accounts for about 60%, and decentralized funds - about 40% of all financial resources. But if we take into account all household incomes and take into account more accurate values of company funds, then the situation may change in favor of the latter.

What shapes the DeFi ecosystem?

The scope of decentralized finance includes:

Stablecoins are the building block of DeFi. Unlike volatile cryptocurrencies such as Bitcoin or Ethereum, stablecoins are designed to remain a stable currency equal to one unit of fiat currency.
Decentralized lending allows you to take out a loan on the blockchain without having a bank account.
Decentralized exchanges allow you to buy and sell cryptocurrencies using the blockchain instead of a centralized exchange.
Loan collateral allows digital assets to be provided to back decentralized loans, creating a resource for the lender in the event of default.
Decentralized identification. For example, identifiers in smart contracts are used to confirm solvency. You can combine DeFi functions for different purposes. For example, if one contract accepts cryptocurrency and generates interest, a second contract can reinvest that interest.
Risk management. High profits in DeFi are often accompanied by equally high risks.