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What is defi (Decentralized finance)?


 Decentralized finance.

What is defi  (Decentralized finance)?

Defi is an acronym for “decentralized finance,” an umbrella term for various financial applications in cryptocurrency or blockchain that aim to disrupt financial intermediaries.

1) What is defi  (Decentralized finance)?

  • Defi is inspired by the blockchain, the technology behind the bitcoin digital currency, which allows multiple entities to keep a copy of transaction history, meaning it is not controlled by a single central source. This is important because centralized systems and human gatekeepers can limit the speed and complexity of transactions while giving users less direct control over their money. Defi is different because it extends the use of blockchain from simple value transfer to more complex financial use cases.
  • Bitcoin and many other native digital assets differ from legacy digital payment methods such as those operated by Visa and PayPal in that they remove all intermediaries from transactions. When you pay for coffee at a coffee shop with a credit card, a financial institution stands between you and the business, which controls the transaction and retains the power to stop or pause it and register it in its own private registry. With cryptocurrency, these institutions are left out of the picture.
  • Direct purchases are not the only type of transaction or contract overseen by large companies; loans, insurance, crowdfunding, derivatives, betting, etc. financial applications. are also under their control. Eliminating middlemen from any kind of transaction is one of the main advantages of decentralized finance.

Before being known as decentralized finance, the idea of ​​Defi was often referred to as "open finance".

2) Ethereum Applications

Most decentralized finance applications are built on Ethereum, the second-largest cryptocurrency platform in the world, which differs from the Bitcoin platform in that it is easier to use to build other types of decentralized applications beyond simple transactions. These more complex financial use cases were even highlighted by Vitalik Buterin, the creator of Ethereum, in the original Ethereum whitepaper back in 2013.

This is because the Ethereum platform offers much more flexibility for smart contracts that execute transactions automatically when certain conditions are met. Ethereum programming languages ​​such as Solidity are specifically designed to create and deploy such smart contracts.

For example, let's say a user requests that their money be sent to a friend next Tuesday, but that only the temperature exceeds 90 degrees Fahrenheit according to Such rules can be written in a smart contract.

Dozens of Defi applications based on smart contracts run on Ethereum, some of which are reviewed below. Ethereum 2.0, an upcoming update to Ethereum's core network, could support these applications by reducing Ethereum's scalability issues.

3) The most popular types of DeFi apps:

  • Decentralized Exchanges (DEX): Online exchanges help users exchange currencies for other currencies, whether it's US dollars for bitcoin or ether for DAI. DEXs are a type of hot exchange that directly connects users so they can trade cryptocurrencies with each other without relying on a broker.
  • Stablecoins: A cryptocurrency that is tied to an asset other than the cryptocurrency (e.g. dollar or euro) to stabilize the price.
  • Lending platforms: These platforms use smart contracts to replace intermediaries such as banks that process loans in the middle.
  • Wrapped Bitcoins (WBTC): A way to send Bitcoins to the Ethereum network so that Bitcoin can be used directly in Ethereum's Defi system. WBTCs allow users to earn interest on the bitcoin they lend through the decentralized lending platforms described above.
  • Prediction Markets: Betting markets on the outcome of future events such as elections. The purpose of Defi versions of prediction markets is to offer the same functionality without intermediaries.

In addition to these applications, new Defi concepts have emerged around them:

  • Yield Farming: For knowledgeable traders willing to take risks, there is yield farming where users sift through various Defi tokens looking for opportunities for greater returns.
  • Liquidity mining: When Defi apps attract users to their platforms by giving them free coins. This has been the most fashionable form of yield farming to date.
  • Composability: Defi apps are open source, which means the code behind them is public and can be seen by anyone. Therefore, these applications can be used to "build" new applications with code as their building blocks.
  • Money Legos: Expressing the concept of "composability" in another way, Defi apps are like Legos, which are toy blocks that kids put together to build buildings, vehicles, and more. Defi apps can be combined in the same way as “money blocks” to create new financial products.

4) lending platforms

Lending markets are a popular form of decentralized finance that connects borrowers and cryptocurrency lenders. A popular platform, Compound, allows users to borrow cryptocurrencies or offer their own loans. Users can earn money through interest by lending their money. It sets compound interest rates algorithmically, so if there is a higher demand to borrow cryptocurrency, interest rates will be raised even higher.

Defi loans are collateral-based; This means that in order for a user to receive a loan, they must provide collateral - usually ether, the token that powers Ethereum. This means that users do not provide their ID or associated credit scores to obtain a loan; this is how regular non-Defi loans work.

5) Stable Coins

Another form of Defi is stable coin. Cryptocurrencies often experience larger price fluctuations than fiat, which is not a good quality for people who want to know how much their money will be worth in a week. Stablecoins peg cryptocurrencies to non-crypto currencies such as the US dollar to keep the price in check. As their name suggests, stablecoins aim to bring "stability" to prices.

  • Notable stablecoins include:
  • Tether (USDT)
  • USD coin (USDC)
  • Binance USD (BUSD)
  • TerraUSD (UST)
  • Day (DAI)

6) How to make money with Defi?

The value locked in Ethereum Defi projects exploded, and many users would make a lot of money.

Users can earn "passive income" by lending their money and earning interest on loans, using Ethereum-based loan applications as mentioned above. The productive agriculture described above has greater return potential but carries greater risk. It allows users to leverage DeFi's lending feature to put their crypto assets to work to generate the highest possible return. However, these systems tend to be complex and often lack transparency.

7) Is it safe to invest in Defi?

No, it's risky. Many believe that Defi is the future of finance and that investing early in disruptive technology can lead to huge returns.

But it's hard for newcomers to distinguish good projects from bad ones. And a lot of problems arose.

As decentralized finance grew inactivity and popularity throughout 2020, many Defi applications such as the YAM meme coin crashed and burned, taking their market cap from $60 million to $0 in 35 minutes. Other Defi projects, including Hotdog and Pizza, suffered the same fate, and many investors lost a lot of money.

Also, Defi errors are still very common, unfortunately. Smart contracts are powerful, but once rules are included in the protocol, they cannot be changed, which often makes errors permanent and therefore increases risk.