A few years back, cryptocurrencies like Bitcoin had hit the financial industry differently.
Lucky bitcoin investors gained high-end profit, and the rest of the finance investors felt envious as they couldn’t see the opportunity coming at the right time.
Today, Decentralized Finance or DeFi is akin to such an opportunity.
When we talk about Decentralized Finance among a crowd of hundreds of Financial experts, only a few of them will acknowledge – what is DeFi.
DeFi is currently experiencing steadfast growth in the industry.
Undoubtedly, enthusiastic investors have their eyes on “when the DeFi platforms make a turn for their benefit?”
So don’t you have any idea of what DeFi meant for and it works?
Not a problem!
As a part of the crypto community, we present a beginner’s guide to Decentralized Finance or DeFi providing learners to cover the informational gap on the DeFi.
After talking to some financial experts and exploring 40+ financial blogs, here’s everything you should know about Decentralized Finance or Decentralized Apps (Platforms).
Here we go!
What is Decentralized Finance (DeFi)?
By definition, Decentralized Finance is an experimental financial classification that eliminates the requirement of a central financial intermediary during a transaction between two parties.
Instead, Decentralized Finance depends on smart contracts on blockchains to originate the process of financial lending or borrowing of funds between two parties.
So Decentralized Finance platform’s users don’t have to deal with brokers, banking institutions, or trading exchange markets.
In simple words, Decentralized Finance is a virtual banking platform that holds its separate financial tools and instruments.
For example, the DeFi (open-source software) offers flash loans to its users where they can take a loan.
However, they have to repay the loan within a single transaction. Competent investors view this scheme as a real-time profit deal.
On the other hand, amateur investors may find it risky due to a lack of understanding of the DeFi platform. So let’s examine why Decentralized Finance even exists when the earlier DeFi-alike platform failed.
If you still have some doubts or unsure if it’s clear for you what DeFi is, just watch the video below:
What is the Purpose of Decentralized Finance (DeFi)?
It is human nature to question everything.
When it comes to Decentralized Finance as a sensational facet in the industry, everyone wants to know why it has been made in the first place.
If you view the traditional marketplace, every factor/app/platform remains in control of the Government. So every financial activity’s centralized structure, such as lending or borrowing of funds, has become a long-term process.
Similarly, the currency exchange or currency system has also centralized for decades.
However, Decentralized Finance takes turns for the benefit of users. It offers a much easier decentralized process to manage and control personal finances than central entities like Banks or Exchange markets.
Above all, Decentralized Finance also roots a few conveniences for users such as:
• Lesser risk of failure with the help of multiple Dapps (Decentralized Finance Apps).
• Transfer in digital currency/cryptocurrency. Thus, you don’t need to wait for the Government to print new notes.
• All decisions are made via smart contracts on blockchains. You don’t need to deal with local governmental authorities or provide references for beneficial results.
After covering the information on why Decentralized Finance made a big entrance in the market, it’s also crucial to delve into the origination of DeFi as the popularity of DeFi was quite sudden.
So How Did DeFi Appear in the Market: The Origin
In 2019, Decentralized Finance or DeFi made it to the ears of high-end investors in the industry.
Currently, DeFi is already more than $9.5 billion (as of September 2020).
Well, soon it became unstoppable. The current worth of the DeFi market has climbed up to $20 Billion, as of January 2021.
All in all, DeFi came into the knowledge of finance experts and investors when the first-ever DeFi Application permitted users to borrow funds online in the form of its digital currency called Dai. The app contains Ethereum Blockchain for smart contracts. Hence, it managed to develop and enhance Dai’s value in the traditional market as well.
Since then, several Dapps have entered the virtual market with a group of unique features and incredible offers for potential investors, lenders, and borrowers.
But How Does DeFi work?
DeFi works using applications.
Decentralized Finance based applications are shortly called Dapps. These apps generally consider performing finance-based provinces using blockchains. It is a type of digital ledger. Such blockchain-based decentralized economies permit users worldwide to get access to smart contracts and use DeFi for their financial benefit.
For the most part, DeFi Applications or DApps support one or all of the following types of services:
• Decentralized Exchanges or DEXs, i.e. cryptocurrency exchange in the absence of central authorities.
• Gaming, i.e.., games that permit rewards in cryptocurrency like Ethereum.
• Financial credibility with lack of identity proof and financial stability.
• Insurance to preserve funds in the form of cryptocurrencies.
• Lend or borrow funds.
• Margin trading.
• Peer-to-peer money transfer.
• Prediction Markets for group forecast concerning financial events.
Apart from the DApps mentioned above, a few applications also offer trading, tokenization, Synthetic Assets, and Staking.
DeFi applications are either downloadable or accessed through web-based extensions or browsers. Several decentralized finance protocols set in the industry help the investors eliminate the pinning points in the traditional finance industry.
Before you go ahead and begin to undertake decentralized Finance as your primary priority, here’s everything you need to know about DeFi protocols:
Are There Any Leading DeFi Protocols?
DeFi protocols are also referred to as Autonomous programs. They have been on-growing to provide users access to decentralized financial sources to borrow funds without dealing with centralized institutions like banks.
There are only a few names/programs that fall in the spotlight due to their unique features and real-time growth statistics in the industry.
Here are some of the top DeFi protocols:
Uniswap is a decentralized Finance co. It supports DEXs or Decentralized currency exchange through ERC-20 swapping capabilities.
Uniswap trades in its separate digital currency called UNI token for yield farming purposes. So anyone who holds a Uni token has the power to interpret the company’s work.
Along with this, such users also get a right to vote. It offers the power to invest Etherum in a Uniswap wallet and trade anytime. Upon trading, the Uniswap token burns and the user cannot reclaim it.
Shortly known as YFI, Yearn Finance also deals in Ethereum-based cryptocurrencies or tokens. It has revealed the YFI consists of a chain of DeFi protocols.
However, the risk level is comparably high. YFI’s official website declares its traders about the risk beforehand.
YFI functions in a unique way – it allows its users to lend their digital assets independently and earn profit in the future.
Also, it’s quite crucial to acknowledge that Yearn Finance is 100% decentralized.
Thus, users must agree to financial laws, terms & conditions set by the company, instead of the Government.
Project Serum is another DeFi protocol that has been in discussions due to its blockchain.
This protocol doesn’t consider a deal in Ethereum.
Instead, its blockchain is related to Bitcoin as well as Ethereum. So the users can deal in other digital currencies such as bitcoin, light coin, lime coin, etc.
One of the most significant advantages the users enjoy is permissionless access to project serum.
What does that mean?
The users don’t need to go through the KYC procedure.
Moreover, the project serum allows its users to remain anonymous.
At the same time, both points are quite advantageous and risky, depending on the investors’ decision-making capabilities and power.
What are the Main Advantages of DeFi?
No Permission Required
Centralized Finance sources more often set up rules & regulations that limit the accessibility of service permission for a few categories of users.
Thanks to DeFi, now every potential user can get access to financial services without needing to fulfill “know your customer or KYC” requirements or provide financial credibility.
DeFi protocols offer flash loans where a borrower can borrow funds without giving any collateral. So they can repay the loan within a single transaction. Further, avoid dealing with post-repayment procedures.
More Opportunities for Innovation
On one hand, where the centralized finance market is in the absolute control of Government and Big Corporators, DeFi has opened up new doors for fresh innovators in the industry.
The people who well-comprehend the functioning of DeFi hold permission to develop new DeFi protocols, programs, and applications as well as contribute to the DeFi industry at an extraordinary level.
Not only this but a few DeFi protocols also deliver the voting power to its token holders.
Customers are in Control with DeFi
Nowadays, an organization that entirely focuses on customer satisfaction always wins.
Undoubtedly, Decentralized Finance platforms also attracted customers by giving them complete control.
At Decentralized Finance Apps, customers have the power to manage their Finance according to their understanding and need. So they enjoy the freedom to invest their digital assets anytime and anywhere without any legal barriers or necessary documentation.
Also, several DeFi platforms claim to offer high-rate interest over the customers’ tokens or digital funds to keep their interest growing.
Flexible Earning Opportunities
One of the primary reasons why investors kept their money in banks as – interest on the money.
However, banking institutions use customers’ money to invest in different markets. Keeping cash in private banking institutions has become risky for the customers. Apart from this, banks acknowledge keeping the larger profit out of customers’ interest income.
Decentralized Finance platforms act as a substitute for centralized banks. DeFi offers a high-rate of interest, and users are free to revive their funds anytime. While using DeFi, many earning opportunities appear as the market fluctuates.
Improved Open-Access with Trust
DeFi is best known for 100% transparency of information that it offers to its customers. With permissionless and open-access, customers can view what is happening to their digital assets and what they can be used for.
Also, DeFi apps don’t claim to provide any financial benefit. It all depends on the investors’ capability to see an opportunity coming in the DeFi’s transparent environment.
No Need to Depend on Banks
It has been so long that we depend on banking institutions for everything that now, they have power over us.
When it comes to centralized banks, customers have to accept whatever interest rate they offer, provide whichever document they ask for, and wait in line for as long as they want.
On the other hand, DeFi is quite an ideal substitute. It has introduced DeFi protocols that eliminate the dependency on banking institutions among customers for small tasks such as build up savings.
So decentralized finance is another type of finance that is separate from any exchanges or banks. Instead, the DeFi works on smart contracts on blockchains, ETH, BTC, etc.
Today, the tech industry is rapidly developing and we should stay updated to overcome the tech obstacles.
Hopefully, the provided information will help people to have enough information to be prepared for future possible financial changes.