This article will teach you all there is to know about decentralized finance and take you from being DeFi-curious to being DeFi-knowledgeable.
For many crypto experts, decentralized finance, popularly called DeFi, started with the advent of Bitcoin. DeFI has progressed beyond simplifying it to Bitcoin in another section. This is because tons of projects have merged, working on their own blockchains and attending to the requirements of millions of users who desire the proceeds of decentralization.
It would interest you to know that DeFi is only one part of the crypto ecosystem. This assertion is important to reiterate because there has been confusion over the years about DeFi being equated with the crypto industry.
That aside, this article will teach you all there is to know about decentralized finance and take you from being DEFI-curious to DEFI-knowledgeable. If you are ready to get started, let’s do so by defining exactly what DeFi is.
What Is Decentralized Finance (DeFi)?
In simple terms, “DeFi” is the general name used for describing financial services, interactions, or transactions that do not require the involvement of third parties. As an example, consider DeFi as interacting with another person but without the need for a traditional financial institution or central entity.
You can also refer to DeFi as the system that allows the use of financial applications powered by the Ethereum blockchain. As it is stated on https://immediate-edge.io, DeFi offers a better transaction model than the old-fashioned financial solutions.
So, if you have been looking for a faster way to make transactions without waiting long days or going through time-draining verification, DeFi might be the way to go. On the other hand, you should also know that DeFi works on a public blockchain.
This means that you can do every other thing that a bank does via DEFI networks on a ledger accessible by anyone. Besides this transparency, you can also lend, borrow, store, and even stake assets using decentralized finance.
Now that you know what DeFi entails, let’s take it further by explaining why this revolutionary system is important for users worldwide. So, in the next section, we will briefly point out a few reasons why you should consider taking part in this financial structure.
Why DeFi Is Important
There are numerous pointers to explain the relevance of DEFI. However, we consider it extremely necessary that we let you know the most important benefits for you. For this reason, here are some of the top reasons why Defi has amassed millions of users lately—and why you might need it too.
- DeFi is open and accessible to anyone with an internet connection. Although you might say that a lot of things are open and accessible. However, it is different with DeFi. By open and accessible, we mean that you do not require the calmness of a gatekeeper to make transactions or access the services offered. You can easily create a wallet without any need for a Know-Your-Customer (KYC) process while keeping your funds safe and highly secure.
- Another reason to take DeFi seriously is how safe, fast, flexible and secure it is. Of course, you might say banks are fast too. There is no denying that. However, moving your assets from “here to there” without waiting for approval from anyone is where DeFi beats whatever you think of the traditional finance procedures.
- The last important thing that you should pay attention to is the interest rate offered. Yes, you might get fantastic interest on your savings or lending elsewhere. However, DeFi attends to that in a more superior manner. If you can do yourself the favor of examining DeFi platforms for a moment, you would notice how more rational the interest rates are. Compared to regular interest rates, DeFi offers far better.
Nevertheless, you should remember that DeFi still forms a good part of the cryptocurrency industry. Hence, the volatility that rocks the sector also affects DeFi. Because of this, we suggest that you do not jump into investing without the right education. Invest your time in research. If you cancan’t the former, speaking with a reliable financial advisor will do you a lot of good.
Now let’s go further by helping you understand how DeFi works. While this might be a little complex, know that we will do our best to ensure that we break it down in the most simple way.
How Decentralised Finance (DeFi) Works
In order to understand how DeFi works, you have to realize that it uses the same blockchain technology as every other cryptocurrency. So, DeFi works in the sense that it uses the underlying blockchain ledger to process transactions with the decentralized application stations.
A better way to say it is that DeFi follows the process of record verifying, and validating the information of transactions through blocks in a fast and secure manner. So, instead of having people verify your transaction, you have blocks on the DeFi networks doing that seamlessly.
You might remember that we mentioned decentralized applications earlier and be wondering what those are. Not to keep you in the dark, we will evaluate some of the existing DApps in the ecosystem. Some of you may be familiar with her; others, maybe not so much.
Decentralized applications are simply tools that help in achieving the objectives of decentralization for the average user.
In other words, it is a platform that facilitates the smooth processing of transactions without the use of a third party. So, what are the kinds of DeFi applications that we have?
Decentralization, as the name implies, simply means a DeFi application that allows the buying, selling, and storage of crypto assets without the need for a central party. It is possible that you have encountered exchanges like Binance or By bit.
However, decentralized exchanges, or DEXs for short, are different from them. You don’t have to worry about providing your identity or proof of address when using DEXes.
This is because they are open-source, trustworthy, and have a system to check for fraud and scams without the need for human interaction. Examples of DEXes include Uniswap, Pancakeswap, and Osmosis.
For lending protocols, it is a unique kind of application in DEFI. You can describe lending protocols as platforms that help in securing a loan in DeFi. How it differs from traditional finance is what makes it unique.
Instead of looking for collateral with assets like real estate or cars, lending platforms allow you to collateralize with other crypto assets you own. Examples of lending protocols you would find in DeFi include Venus and Tectonic.
Liquid Staking Protocols
If you have ever locked up your fund for a particular period in return for interest or reward, then you have an idea of what liquid staking is.
So, you can define liquid staking as the process of locking up your assets for a particular period with the expectation of a reward at the end of the said time frame. In liquid stalking, you deposit your funding into a DeFi application called the protocol.
After which, you receive a tokenized version of the asset, while your funds remain in escrow till the due date for withdrawal. Examples of liquid staking protocols include the popular Lido Finance, Rocket Pool, and Ankr.
There are, however, other services that you can access with DeFi applications. These services include yield farming, composability, liquidity mining, and cross-chain networks. Going forward, let’s assess how traditional finance differs from DeFi.
Difference Between Traditional Finance and Decentralised Finance
|Users have a stipulated period to transact||The DeFi market is open 24/7|
|Requires an intermediary for approval||Transactions processed without any central authority|
|Transactions can be hindered or slowed down due to unnecessary network outage||Fast transactions regardless of location, or time|
|Requires KYC before access to assets||Users are in full control of assets they own|
|Can’t solve the problems of the unbanked||Has the potential to help the underbanked and unbanked access financial services|
DeFi: Frequently Asked Questions
At this point, you may still be curious about some parts of DeFi. Interestingly, we have resolved to help you take away that worry. In this section, we will address some of the popular questions that crypto newbies ask. So, if you have had a pending curiosity, you will be making a good decision by not skipping this part. Read on!
Is Bitcoin a Part of DeFi?
There have been many misconceptions about what Bitcoin is or its role in DeFi. Of course, Bitcoin encourages decentralization. However, the cryptocurrency with the highest market value remains what it is: a cryptocurrency, and it is not part of the DeFi ecosystem.
It is Ethereum that you can refer to as being part of DeFi because you can build applications on its blockchain. This is something you cannot do on the Bitcoin blockchain.
Are there Risks Associated with DeFi?
Certainly, there are risks associated with investing in DeFi. As previously stated, it remains a member of the cryptocurrency family. Hence, it remains very volatile. However, there are other risks linked to DeFi, including, but not limited to, slow user adoption, scalability, and unmonitored regulation.
Can I Make Money with DeFi?
The decentralized finance ecosystem certainly offers an avenue for users to make extra income. The ideas of staking, yield farming, investments, and the derivatives market offer these potentials. So, yes, you can make money with DeFi.
SEE ALSO: How Crypto Trading Work
At the same time, there is no guarantee that all your investments will yield profits or result in a positive ROI. As a beginner, we recommend doing intensive research on any of your potential investments before making any decisions. In retrospect, you can also consult with experienced DeFi users or reputable investment advisors.