What is DeFi: A Comprehensive Introduction to Decentralized Finance

The growing cryptocurrency industry has created opportunities for different companies to create innovative solutions for end-users. The Decentralized Finance, DeFi, is one of such projects targeted at offering members of the cryptocurrency community better alternatives to perform transactions.

DeFi is an elaborate concept that started with the Ethereum network, but its features have been integrated with Bitcoin and many other cryptocurrencies you can find on the market.

DeFi – Overview

To give a simple explanation, DeFi is the platform that supports smart contracts to enable DApps and other crypto-based subscriptions to function according to your requests. The platform supports a wide range of financial services while giving the crypto community control over its applications. Decentralizing the features of DeFi reduces security threats and monopoly, which makes it much better than traditional banks.

At inception, DeFi applications were created to provide lending services to members of the crypto community. Over time, its value extended to allow users to save, invest, and trade crypto. At the moment, a long list of DeFi features currently exists. Analysts who watch crypto market trends have identified DeFi as a potential replacement for traditional banks and other financial companies.

The DeFi concept thrives on its open-source code, which allows members of the crypto community opportunity to create or improve any application to give users a better experience.

Previously, everyone believed it was impossible to decentralize the financial sector, which was predominantly controlled by governments in different countries. The DeFi success is proof that anything is possible with the Blockchain. No government or wealthy individuals can claim to control DeFi systems. And you have complete control over your financial assets.

Many people have embraced the DeFi option because it is less risky. Hackers will need to do a lot of work to access different online locations where crypto funds have been dispersed. Unlike banks, where all your money can be stolen if the hacker gains access to the banks’ central system.

Financial revolution with Decentralized Finance

After analyzing the benefits of using DeFi based systems for financial transactions, we have realized how commercial banks and other financial institutions have limited our potentials. Commercial banks control everything about finance, such as borrowing, interest rates, savings, and financial transactions. We understand that banks have survived over the years with their stringent approaches. However, it is time for a change with DeFi.

There’s also the need to provide personal information and meet certain requirements before dealing with banks. Particular operations also require your physical presence in the bank. These are experiences that DeFi can change for good.

The DeFi concept Using DeFi services, you can access a wide range of financial opportunities without being physically present. All you need is steady internet connectivity. Banks are not involved in transactions, and you are free from third-party financial service providers. Also, you can perform financial transactions at any time because the market works 24/7. Generally, the reviews about DeFi are excellent.

Many crypto community members have specifically mentioned that the ability to perform transactions with BTC and ETH at a cheaper rate encourages them to use DeFi systems.

By leveraging DeFi, investors can earn more money by consolidating long and short-term investment strategies. The concept poses a big opposition that could make the commercial banks review their operations in competition.

How DeFi works

The Decentralized Finance platform depends on the Blockchain network, smart contracts, decentralized ledger, and peer-to-peer interaction across different systems. It is open to everyone since there are no geographic borders or hectic registration processes.

The DeFi operating system works with programmed codes that allow you to perform transactions. For example, if you would like to make a purchase or borrow money, you only need to send the cryptocurrency value to an escrow linked with a smart contract. The seller only receives your crypto after sending the product you want to buy. In the case of taking loans, you will get the needed funds while your cryptocurrency is held until you repay the money you borrowed.

The crypto community has praised the elimination of intermediaries and third-party companies from taking high commissions after a transaction is completed. The use of smart contracts also makes it possible to perform transactions without actually interacting with the other party.

Projects and financial solutions created based on DeFi

During the lockdown period during the pandemic, 2020, more crypto community members realized all the things they could do with DeFi. This realization encouraged new projects and made the DeFi concept popular.

Here are the popular projects associated with DeFi;

Decentralized exchanges (DEXs)

Any member of the crypto community can use decentralized exchanges to buy or trade crypto independently. The exchange platforms support the DeFi concept by boosting the number and frequency of trades done with cryptocurrency.

All transactions done through decentralized exchanges function based on the Blockchain. You will not need to go through a lengthy registration process while using exchanges, and you have control over funds stored in software or hardware wallets. Transactions are funded from your wallet, and recently, investors can now use smart contracts to acquire or sell crypto assets securely.

You have a choice to use DEX on different Blockchain networks. For example, you can use DEX on BTC or ETH networks. For trading activities with ETH, you will need to use a DEX on the Ethereum Blockchain network to acquire or sell ERC 20 tokens. The same procedure applies if you want to trade with Bitcoin.

Also, you will need to get a wallet compatible with the DEX before initiating transactions. These wallets are under your control, which means you must ensure the private key is safely hidden from other people.

Regarding DEX transaction fees, it varies, so you should research to find an exchange that offers reasonable transaction fees. DEXs are improving to accommodate more users and trading volume, which is good news for crypto traders who need more cryptocurrency in their wallets. DeFi will continue to complement the exchange services, and we expect long-term sustainability.

Wallets

Another essential project that has supported the growth of DeFi is the successful invention of wallets. You can store your crypto assets in wallets. It is possible to have different crypto wallets when necessary. Some DEXs offer users their wallets, or you can get your software or hardware wallet. Every wallet for holding crypto comes with two keys. The private and public keys. You must never reveal your private key to anyone. Without the wallets, DeFi concept couldn’t have survived.

Oracles markets for crypto prospectors

Activities on the Decentralized Finance platforms include predicting potential outcomes for crypto pricing trends. The Oracles were developed to help new and existing investors in the crypto market to predict outcomes confidently. Prediction and bets are placed through deals involving smart contracts, so all parties involved are protected.

Aggregators

Aggregators are essential applications that enhance user experience with DeFi platforms and increase profits. After acknowledging complaints from users, software engineers developed the aggregators, which are interfaces that make it easier for users to leverage DeFi features. Aggregators make it possible for investors to authorize the transfer of crypto assets from one platform to another during sales or purchases.

Decentralized crypto marketplaces

The Ethereum Blockchain network has supported decentralized marketplaces for cryptocurrencies. These are open-source marketplaces where anyone can search, find, and transact business with another person directly. Transactions are secure because it is done via smart contracts. The boom in transactions on the decentralized marketplaces has promoted DeFi in general, which facilitates sales and purchase of coins or NFTs.

Layer one

Developers have declared their preference for layer one as the most suitable Blockchain to create apps. During the process, DeFi protocols are integrated with these apps to offer users more value. One of the Blockchains categorized as layer one is the Ethereum network. Another is the Binance Smartchain network, and there are others. These platforms can interact with each other to make transactions across platforms easy.

The advantage of having different Blockchains that work with similar DeFi protocols is the uniform pricing and top-notch services. Blockchain developers will put in their best efforts to ensure their platform is not the broken link during recurrent transactions.

Practical examples of DeFi in use

Below, you will read about practical cases directly involving the use of DeFi. Many of these platforms are still under development, so we expect so much more in the coming years.

Lending and borrowing services

These are two popular services facilitated by DeFi. With the concept, it is easier to access funds in fiat currency while leveraging your cryptocurrency as collateral. Isn’t that convenient? You get your crypto back after repaying the loan. Borrowing and lending through DeFi services are sustainable. Many of the service providers have a total value locked (TVL) worth billions of dollars.

Stablecoins

As the name suggests, stablecoins provide assurance for investors who do not want to take risks and lose money. Losses can happen when the crypto asset’s value suddenly falls. Stablecoins are suitable for smart contracts.

The availability of stablecoins in the crypto market inspires confidence among the crypto community to use DeFi based applications for purchases, bets, or trading. Stablecoins do not have volatile risks because they are linked with fiat currencies such as USD, Euro, and other stable global currencies.

Borrower’s Margin advantage

The margin is an allowance that permits members of the crypto community to borrow their preferred crypto while using another crypto as collateral. This transaction is done via smart contracts to facilitate DeFi. Many investors are taking advantage of this offer to get ahead in crypto trading or prospecting.

Leverage for borrowing

DeFi has created the opportunity for you to earn money as returns on the crypto you use as leverage when borrowing from a crypto finance service. This means that if the value of your crypto held as collateral increases, you become richer. Leverage clauses are programmed into the smart contract, so there is no worry about being cheated.

DeFi as a source of passive income

Have you heard about the benefits of joining a liquidity pool? It is one of the best investments you can make as a crypto investor. The liquidity pool is an organized setting that offers trading liquidity to other crypto investors who pay a fee. In the end, the profit earned from trading clients is shared among all members of the liquidity pool. As usual, all transactions feature smart contracts, so there is no fear of losing money during transactions.

DeFi promotes liquidity pool investments by creating the independence for pool administrators to analyze and permit transactions based on general votes. It is a great idea for you to join a liquidity pool if you are holding high-valued crypto in wallets. It is just like making your money work for you by earning interest on your accumulated crypto.

Does DeFi pose any risks?

So many things about the DeFi concept and Blockchain are still new. While many people have accepted DeFi, there is a large percentage of investors who have not come on board because transactions are too slow. The popularity should have tripled by now if the Ethereum Blockchain was scalable to speed up the transaction processing time. The launch of ETH 2.0 is expected to address this issue.

It is still uncertain how governments around the world will accept DeFi, considering its impact on the traditional banks. Governments are happy to be in control of the banks and financial institutions in their countries. It is not known if these governments will enact new laws to limit the widespread adoption of DeFi platforms.

The DeFi concept is still fairly new, and there are so many options to explore. We have high hopes for its future, which can help more crypto investors become successful. It will be a great joy if the stakeholders can find a way to collaborate with the traditional banks to adopt the DeFi concept. It can be integrated with existing centralized finance systems to feature relevant functions of DeFi. For now, we will continue leveraging all the advantages that DeFi has created for us, the crypto community.