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What is DeFi? The definitive guide to Decentralized Finance

When money changes, a lot more changes. Almost everything can become possible. All over the globe, Blockchain Technology delivers immeasurable opportunities for innovations far beyond what previous generations could even imagine. The way money is created and administered in today’s digital economy will lighten someone’s Purse and the same time make ends meet.

Nowadays even the US Dollar banknote is no longer a safe currency, In fact, many businesses worldwide have banned cash transactions and the government is taking extra precautions.

And you know what?

The paper notes used daily by millions of people daily including YOU are vulnerable to the health of people as they are easy carriers of communicable diseases, as a matter of fact, the virus that causes Covid-19 can survive on Banknotes for up to 28 days.

And what’s worse

Financial intermediaries like commercial banks, Investment banks, or pension funds could be running on dirty or contaminated banknotes!

The move away from cash has been a long-term trend, and I believe that Decentralization is a Fail-proof solution in building the Digital Economy.

Do you want to know what DeFi is? Then don’t worry, we’ve compiled a ton of need to know information about the future of Blockchain Applications.

Ready? Let’s jump right in and get started…

What is DeFi and why is everyone talking about it?

DeFi aka Decentralized Finance is an ecosystem of financial applications built with Public Blockchain technology and Smart Contracts. Within the DeFi ecosystem, any individual can quickly access Decentralized Applications (Dapps) such as loans, insurance, crowdfunding, and derivatives, available on any device.

Unlike the traditional banking systems, where you have to trust the Financial Authorities to manage your money or verify your transactions.

DeFi users on the other hand have the ability to borrow funds, take out loans, deposit funds into a savings account, or trade complex financial products, all without asking anyone for permission.

Basically, DeFi provides the framework for making decisions as to how to manage your digital assets, and by design DeFi is permissionless, Meaning you’ll have no man in the middle to block your transaction or freeze your account, It’s just an interaction between you and your Blockchain technology, there is no centralized authority involved.

That is to say, the money you own in a DeFi ecosystem are yours and yours alone, It’s basically just an interaction between you and your Blockchain technology, there is no centralized authority involved.

How To Use Decentralized Finance Services

With the help of DApps, People painlessly execute basic financial functions on the DeFi-ecosystem.

A DApp is simply a distributed software that performs specific functions for end-users all over the world, Just like the internet, Decentralized Apps are universally accessible but instead of information being transferred globally, Digital currencies are being invested, stored, or Transferred directly to merchants.

Basically decentralized applications helps end-users in management of their Cryptocurrencies.

If you want to use a DApp on your Smart device all you need is to download your Web3 browser, and start lending, borrowing, or trading with your digital currency. Don’t worry your account is not tied directly to your real-life identity.

Decentralized applications leverage web 3.0 standards for signing of transactions and authentication. Thereby, drastically reducing the need for AML/KYC Verification and making financial tools inclusive to a broader audience.

Uses of DeFi

DeFi applications do not need any intermediaries (Middlemen) as the code specifies the resolution of every possible dispute, and the users maintain control over their funds at all times. This reduces the costs associated with providing and using these products and allows for a more frictionless financial system.

The following list is not an exhaustive set of innovations in the Blockchain space, but each represents a powerful idea for financial inclusion:

  • Decentralized Exchanges: Today most DeFi users perform their trading activities on Decentralized exchanges (DEX), Why? Because of its optimized usability, deeper liquidity anybody can trade with a DEX and not worry about the local Governments restrictions, for this reason the DEX ecosystem keeps getting stronger by each day. The main difference is that with a DEX, users do not need to deposit or withdraw funds, they simply connect their Digital wallet to a website interface. Centralized exchanges(CEX) are a vulnerability in the Blockchain ecosystem. They are the targets of hacks, fraud, and manipulation. Many exchanges charge exorbitant listing fees for new projects, creating minor barriers to entry for small, legitimate projects while rewarding projects that raise higher amounts of capital.
  • Staking: In the DeFi space staking is the process of placing tokens into a smart contract or platform to secure the network, provide liquidity for other purposes, or simply stabilize the token supply. With so many use cases needing instant and deep liquidity to be effective, nearly every platform offers staking benefits, both as a reward for participation as well as recognition of the risk of temporarily surrendering control of your funds.
  • Lending and Borrowing: DeFi transforms this sector of Finance by enabling users to lend and borrow directly in a Person to Person(P2P) manner, removing a banking intermediary from the entire process. Balance verifications are based on a Blockchain, assets are transferred to a smart contract as collateral, and interest rates are deducted without human intervention once the conditions are set. Typically, these loans require a high collateralization rate to avoid liquidation when market prices fluctuate.(Data: Total Lending Interest per year on DeFi ecosystem)
  • Derivatives and Synthetic Assets: With derivatives and synthetic assets, DeFi has the potential to unlock the trillion dollar global financial markets, making them more accessible and efficient. This offers the DeFi industry a long-term path to true sustainability beyond just the cryptocurrency trading, lending, and staking space.
  • Prediction Markets: Decentralized prediction markets have the ability to disrupt the betting industry, as markets can be created on anything from sporting events to political elections. Augur, a leading platform in this space, allows users to stake tokens on the outcome of certain events. Currently, events that are open for betting regard a wide range of topics including sporting events, the 2020 US Election, the amount of COVID-19 cases. (See: Decentralized Applications on the DeFi list)
  • Insurance: With billions of dollars locked in smart contracts, coupled with the risk of hackings, malfunctions, and exploits, the DeFi space sorely needs a fallback plan in case disaster strikes. Opyn and Nexus Mutual (NXM) are two platforms that allow users to buy insurance on their holdings or platforms. If tokens are lost due to accident or theft, the insurance will pay out to the user. Unlike traditional insurance policies, users can buy insurance on tokens they don’t have. In a sense, it can be viewed more like a bet on the soundness of the platform. As long as users buy coverage, if the platform fails, they are entitled to returns.
  • Stablecoins: A stablecoin is a type of cryptocurrency that is designed to maintain a stable market price. Recently, this type of digital currencies has grown in popularity, and we now have numerous stablecoin projects. The idea behind stablecoins is to provide some of the advantages of both fiat currency and cryptocurrency worlds. Currently, stablecoins are mostly used as a hedge against the high volatility of cryptocurrency markets, but depending on the context, they can also be used as a stable currency that provides increased transparency and decentralization. Also, when compared to traditional fiat currencies, they present faster transactions and lower fees, with an average of $0.2/transaction (Ethgasstation, 2020), making them quite useful for everyday payments and international transfers.

And that’s it! Now you know the new set of Technologies disrupting the global financial market, If you are thinking of using Decentralized services for your company, I encourage you to read this article compiled by Ariel Shapira the founder at Entrepreneur.com (Decentralized Finance Is on the Rise. What You Need to know…)

Once you’ve cracked using these New Financial Applications, you can generate yield with your Digital Assets, convert them into Cash, and actively manage your funds and investments in a Personalized Dashboard.

We hope you liked our article on Decentralized Finance, If you have a Question, drop us a comment below. And don’t forget to follow us on Twitter and Facebook for more helpful Blockchain tips


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1 Response

  1. February 18, 2021

    […] Internet and Decentralized banking have become the single biggest channel at the moment of reaching customers and for customers to […]

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