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Want to learn more about DEFI?

Learn everything you need to know to start your journey in the world of decentralized finance

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In this DeFi article, you will learn:

  • What is DeFi
  • What are Stable Coins
  • Borrowing and lending
  • Decentralized Exchanges (DEX)
  • Derivatives
  • Yield optimizers
  • Payments
  • Insurance
  • How DeFi works
  • What is the difference between DeFi and conventional finance

What is DeFi?

DeFi is, literally, decentralized finance. services, or decentralized finance is a common name for analogues of traditional financial instruments implemented in a decentralized architecture. These services are public, open source, and most often based on smart contracts.

Decentralized finance or a new financial technology based on secure distributed ledgers similar to those used in cryptocurrencies. The system eliminates banks' control over money, financial products/services

DeFi is also a general term for financial products and services available to anyone who uses, for example, Ethereum. With DeFi, the markets are always open and there is no one who can block payments or deny you access to anything. Services that were slow have become faster and more secure, and are now handled by code that anyone can test and scrutinize if required.

There has recently been a booming crypto economy where you can lend, borrow, go long and short, and more. Some people have used DeFi to avoid damaging inflation. There are those who have even borrowed and repaid millions of dollars in loans without identification.

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WHAT IS STABLE COINS

Stablecoins are tokens that are 1:1 matched with fiat currency, mostly US dollars (USD) themselves. DeFi-based stablecoins are issued by using other crypto assets as collateral and are largely over-collateralized, meaning the underlying assets are larger than the issued token.

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BORROWING AND LENDING

They enable users to provide assets to generate income and others to borrow while providing collateral. All financial services rely heavily on credit systems, and DeFi is no different.

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DECENTRALIZED EXCHANGES (DEX)

They provide the ability to swap and trade assets in a decentralized manner, without taking custody of funds and without any insolvency risk. Since they operate without an intermediary organization for clearing transactions, they rely instead on self-executing smart contracts to facilitate trading and liquidity pools (LPs) from where liquidity providers can earn value accrued by fees in the form of protocol tokens. Notable examples include Curve, Uniswap and SushiSwap.

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DERIVATIVES

A derivative is a contract whose value depends on another underlying asset such as crypto assets, stocks, commodities, currencies, indices, bonds, etc. Decentralized derivatives cut the middleman by providing the equivalent of financial derivatives such as options, synthetic stocks, futures and more.

Mirror protocol, a protocol that allows the creation of synthetic assets that mirror real securities.

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Yield Optimizers

Yield Optimizers are a set of decentrilized finance protocols that allow users to optimize their earnings on crypto assets through lending and trading services. They do this through a series of vaults which are a collection of investment strategies designed to generate the highest returns from other DeFi projects/ Liquidity Pools. This allows them to have a tax efficient yield farming strategy while maximizing the optimal returns on a given asset by compounding gains through smart contracts.

Popular Yield Optimizers include YFI, CVX, BIFI, AUTO, TOKE, TULIP.

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Payments

These enable rapid and trustless transfer of value between two parties, to facilitate trade and commerce. Fully decentralized solutions that offer customers a simple and user-friendly way to make payments

Popular payment protocols in DeFi include xDAI, Sablier. zkSync

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Insurance

The decentralized insurance protects against smart contract and market risk, it provides protection against asset loss or loss in the value itself. DeFi insurance works by decentralizing covers from a deceentralized pool of coverage provider. You can decide to participate in said pools as a liquidity provider and act as a coverage provider by locking up capital in said pools. As a coverage provider you earn interest on the capital you lock up as a coverage provider. This interest is paid for using the coverage buyers’ premium.

As a coverage buyer, coverage will cover the risks mentioned through the cover description itself, certainly the best way to use DeFi protocols confidently.

Popular insurance protocols in DeFi include Nexus Mutual (NXM), InsurAce (Insur), Unslashed Finance (USF)

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How does DeFi work?

Decentralized finance uses blockchain technology, which is also used by cryptocurrencies. Blockchain is a database or registry. There are applications used to process transactions and run the blockchain.

In the blockchain, transactions are recorded in so-called blocks and then verified by other users. If the verifiers agree to the transaction, the block is closed and encrypted; another block is created containing information about the previous block inside it.

Blocks are “linked” together using information in each ongoing block, which is called a “blockchain”. Information in previous blocks cannot be changed without affecting the following blocks, so it is not possible to change the blockchain. This concept, along with other security protocols, ensures the secure nature of the blockchain.

By the way, there is also a P2P DeFi transaction. This is when two parties agree to exchange cryptocurrency for goods or services without the involvement of a third party.

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How is DeFi different from conventional finance?

DeFi

  • You keep the money.
  • You control all costs.
  • Transfers of funds occur in minutes.
  • Available to everyone.
  • Markets are always open.
  • Anyone can view product data and check how the system works.

Ordinary finance

  • The money belongs to the companies.
  • Companies must be chosen in order to entrust them with the disposal of money.
  • Payments may take several days due to manual processes.
  • Financial activities are closely related to your personality.
  • You must apply for the use of financial services.
  • Markets are closing because workers need breaks.
  • You can't just ask for a product's credit history, report on their managed assets, and so on.
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