Everything You Should Know About DeFi
Blockchain technology is shaping the world of finance. Since its emergence, we've obtained cryptocurrencies, NFTs, and one of the most talked-about trends in the sphere, DeFi.
"DeFi" is an acronym for decentralized finance, an open-source financial system that anyone can access. It functions like a bank but digitally, offering similar services while using a trustless network. To learn more on what DeFi means, and its role in modern-day finance, stick with us. We will explain everything you need to know about decentralized finance and how it works.
What is DeFi?
Decentralized finance (DeFi) aims to build an open financial ecosystem supported by blockchain technology. It offers financial solutions without the need for intermediaries. Instead, it relies on a permissionless network and peer-to-peer system (customers to customer) to operate.
Thanks to Ethereum and its smart contracts feature, developers can build blockchain applications focused on offering financial services to anyone with an internet connection.
Decentralized finance offers a modern outlook to financial system solutions. It is a digital financial framework where everyone is equal, and can access the same banking and financial service opportunities irrespective of identity, credit history, or bottom line.
With DeFi, crypto users have access to financial services such as crypto lending, borrowing, staking, yield farming, trading digital assets, and earning crypto interests.
The Difference Between DeFi and CeFi:
CeFi has a stronghold in the crypto industry. Centralized exchanges like Binance and Coinbase have the largest trading volumes in the global crypto market. They also offer financial and banking services like lending, trading, and staking cryptocurrencies. CEXs also have the advantage of supporting fiat pairs, making them ideal and more mainstream than decentralized exchanges, which do not support fiat payments.
Decentralized exchanges are also ideal. But for crypto enthusiasts who want to trade more token options at a cheaper fee. And users who desire privacy and want to explore a world full of decentralized applications (Dapps).
DeFi vs CeFi: Benefits
The main benefit that DeFi has over CeFi is that you have full control over your assets and own the private keys to your wallet. This is unlike Binance and most CEXs, where the exchange has your private keys, which means that the exchange is responsible for keeping your funds safe. So, if they ever get hacked, your funds may be stolen.
Also, you are subject to the rules a centralized exchange imposes on you. Whereas, decentralized finance creates a fair and transparent financial system where anyone can participate.
Lastly, It is basic procedure for centralized exchanges like Coinbase or Binance to ask you to verify your identity before using their platform. But a decentralized exchange like UniSwap and PancakeSwap allows traders to be truly anonymous, as they do not mandate a KYC or registration.
The DeFi Ecosystem
The DeFi ecosystem is vast, consisting of decentralized exchanges along with other decentralized financial services platforms and projects.Other sectors of the DeFi ecosystem include;
- Decentralized exchanges: Some notable exchanges include Uniswap(UNI), KyberNetwork, SushiSwap(SUSHI), Loopring(LRC) 1Inch, Balancer (BAL), and Curve.
- Decentralized stablecoins: Notable DeFi stable coins are; DAI and USDC
- Decentralized Lending and Borrowing: Some notable lending projects include AAVE, Osis, Equilibrium, MakerDAO, Fulcrum, and Compound.
- Decentralized Insurance: A few projects include Hakka Finance (3F Mutual), Yearn Insurance, and Nexus Mutual.
- Yield Farming: A few DeFi projects that support yield farming are; Sushiswap (SUSHI), Luaswap (LUA), Hakka Finance (HAKKA), Bella (BEL), and Flamingo (FLM)
Why is DeFi Important?
DeFi bears the true autonomous promise of the blockchain industry.
In essence, DeFi is important because blockchain promises complete control of funds. As of now, the government regulates centralized exchanges, and there's no telling how far these rules may go. But with decentralized exchanges, no government regulation or crackdown can affect its financial framework -- making for a truly independent platform.
Reasons To Invest In DeFi
DeFi applications do not require third-party custodians or authorities. Thus, users can connect their wallets and trade without going through any tedious verification process. DeFi also allows users to own private keys. Transactions are recorded under generated names to ensure true privacy.
DeFi relies on blockchain technology, a public ledger that records all transactions occurring in the system. It cannot be tampered with or destroyed.
DeFi is called permissionless for a reason. This means anyone anywhere can access DeFi applications and services without restrictions.
DeFi is rapidly growing in the crypto industry. With many developers creating projects with reasonable use-cases. It is also becoming a popular alternative to traditional finance, where the profitability of assets falls on low-interest rates and limited borrowing power.
To participate in DeFi, users need to access decentralized applications (dApps) built on the blockchain platforms. But before investing in DeFi, you should know it's still a developing sector, and as such, there are risks.
This content should not be treated as investment advice. Cryptocurrency is a highly risky and speculative market.