Heard all the talk about DeFi but have no idea what it is? In this blog we will simply define and explain it.
A Simple Definition Of Defi
DeFi is short for Decentralized Finance and refers to the financial system and opportunities that exist on the blockchain. It’s similar to dealing with traditional financial organizations, except with DeFi, it’s much faster and doesn’t require a third party or all of that exhausting paperwork!
Why Do We Need Defi?
Bitcoin was created as a digital cryptocurrency to buy goods and services and send money on the blockchain without the need for the control of governments, banks or other middlemen. DeFi expands on that basic notion, creating an entire ecosystem of financial products and opportunities. But it does it without the overheads (skyscrapers, trading floors) and fat cats (overpaid CEOs and bankers) feeding off the system. It has the potential to create any number of free and open financial markets which can be accessed by anyone with a computer and an internet connection.
What Can We Do With Defi?
Most DeFi runs on the Ethereum blockchain requiring users to download software known as dApps (decentralized apps). These are many and varied and open up a huge world of possibilities including:
Financial services – basic peer-to-peer borrowing and lending
Decentralized money exchange – crypto to crypto, crypto to fiat (such as the US dollar) or vice versa.
Stablecoins – a cryptocurrency connected to a more stable fiat currency (usually the US dollar) to reduce volatility. The following stablecoins are all tied to the US dollar:
- Tether (USDT)
- Dai (DAI)
- Binance USD (BUSD)
- USD Coin (USDC)
Betting – allowing users to bet on anything from sporting events to election outcomes.
Financial Opportunities With Defi
Unlike traditional financial institutions, you won’t need to fill out an application or open an account. Once you have the software, there are many options at your fingertips:
Borrowing money – you can get a loan instantly including “flash loans” which are very short term loans not available from banks. And all without filling out any paperwork.
Lending money – Loan your cryptocurrency and be paid interest not by the month but by the minute!
Trading – Trade cryptocurrencies peer-to-peer. It’s like trading shares on the stock market but without paying a broker any brokerage fees.
Saving – Put your crypto into savings accounts that earn more interest than the banks will offer.
Buy derivatives – Make long or short term bets on particular assets or cryptocurrencies. It’s essentially crypto’s answer to stock options and futures.
Yield Farming – A more elaborate strategy unique to the blockchain. This is lending or staking cryptocurrency into a liquidity pool in exchange for interest and other rewards. It can be risky but very lucrative.
Liquidity Mining – A derivative of yield farming where users contribute cryptocurrency to the DeFi protocol to allow others to trade within a platform. They are rewarded with a share of fees and newly issued tokens.
The Benefits Of Defi
People are flocking to Ethereum-based DeFi projects with vast amounts of money being made. Here’s why.
Decentralized – there is no middle man helping himself to fees and no third party holding your private information.
Always open – You don’t need application forms or open an account. You just need to create a crypto wallet.
Transparent – All transactions can be viewed at all times by anyone.
Flexible – Move assets around at any time without restrictions, delays or fees.
Fast – On the blockchain, interest and rewards are updated constantly, sometimes as often as every 15 seconds.
Pseudonymous – Privacy is paramount. You don’t need to give up your name, email address, birthdate or any other personal information.
Lucrative – Has the potential for faster and greater rewards than are available from traditional financial products.
The Downside Of Defi
While there are great opportunities with DeFi, there are also risks involved. Investors need to carefully research their strategy and, like in the real world, not be seduced by dodgy projects.
Volatility – the value of your crypto assets can move up and down very quickly, depending on which dApps you use and how you use them.
Cost – fluctuating transaction rates can sometimes make active trading expensive.
Remote – Because there is no governing body, there are no consumer protections and if you forget your password, there is no way to recover your money.
Government regulations – The blockchain and DeFi are free of regulation but some jurisdictions will still view profits made as taxable. Keep your own records and check what rules apply to you.
Want To Know More About Defi?
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