What is DeFi? A Guide to Decentralized Finance

Trading Made Easy 2022-07-22 16:52:38

Understand why Cryptocurrency Wallet are a crucial part in DeFi ecosystem and how it differs to CeFi


DeFi revolutionizes our current financial system using the Ethereum blockchain. By doing so it allows you to lend, borrow, invest and even trade without the intervention of central authority.


What Is DeFi?


Decentralized Finance (DeFi) is a newly emerged terminology that's used by combining the two interlinked activities related to robust decentralized technology and finance that developed a unique financial system in crypto. 


DeFi applications reconstruct traditional finance systems such as lending, borrowing, investing, or trading with cryptocurrency. In the conventional financial system, deposits and earnings are denominated in fiat currency. However, all DeFi projects allow deposits and earning interest with crypto. 


This system is built on open-source and public blockchain networks that allow anyone to create financial applications such as borrowing, lending, or trading and enable them to execute without centrally controlled banks or financial institutions.

Decentralized means permissionless peer-to-peer network. A Peer-to-peer system is a group of nodes or computers that are interconnected with each other and can share data between the nodes over the internet without having a central server, and each node acts as a server for sharing and storing files.


Decentralized Finance Meaning


Decentralized Finance exhibits two broad meanings:

  • A global financial system on open-source technology
  • Allow anyone to create financial applications devoid of a single point of control, built on the Ethereum platform focusing on providing banking services with no intermediaries.


A Comparison Of DeFi Vs. Traditional Finance


DeFi creates a set of financial products on open-source technology. The idea is that anyone can use code in order to create these services since they are not part of any centrally controlled authority. 


Alternatively, traditional finance is governed by licensed financial intuitions under the ambit of laws and is operated by banks/institutions that are duly authorized by regulators.


The potential of decentralized finance is often observed when it contrasts with traditional finance.


Access to Financial Services


One of the most inspiring aspects of DeFi in crypto is to provide financial services irrespective of geographical barriers.


According to the Global Findex database, the World Bank, currently, there are around 1.7 billion people who are deprived of financial and banking services due to significant reasons, such as lack of credit history and records. In contrast to this, DeFi platforms eliminating mandatory conditions of credit checks allow access to all to take advantage of financial products by collateralizing their crypto-asset in DeFi projects.


International Transaction Cost


Each year, foreign workers send billions of dollars to their home country using banking channels that charge extortionate fees and eat a significant portion of their hard-earned money. However, DeFi projects have the potential to process a high volume of transactions at a low cost. It verifies payment transactions by nodes without the intervention of a middleman cutting down the administrative cost and saves millions of dollars.


Decentralization Vs. Centralization


The most promising feature of DeFi solutions is to alter the centralized model of traditional financial projects into the widely accepted decentralized model. 

We have witnessed that millions of customers' Visa/Master cards’ information have been hacked from the database of the bank when they transact online. Consequently, the trust of the people was shaken in the traditional financial sector. On the contrary, Decentralized Finance keeps records of transactions across millions of nodes through peer-to-peer networks without the involvement of central authority. The network verifies the transactions employing a cryptographic hash function that converts data into a string value, which is highly secured and stored on the blockchain that makes the entire process transparent. In DeFi, users have greater control over their funds. Conversely, intermediary institutions hold your fund in the traditional finance sphere.


Business Hours


DeFi markets remain operative round the clock 24/7,365. There is no limit to business hours for a specified time zone, nor to restrict trading hours. Alternatively, the centralized traditional institutions market is limited to business hours according to their time zone. Employees execute traditional financial services and they need a break. This is the reason; the traditional finance market remains closed for business activity for specified hours.


Transfer Of Funds

In traditional finance, manual handling takes time to proceed with money transfers while DeFi provides instant payment transaction solutions through a digital ledger. Ethereum 2.0 has the potential to facilitate the DeFi system to support approximately 100,000 transactions per second, and make the transfer of funds faster and cheaper as well.


History Of Decentralized Finance


The history of DeFi is as old as cryptocurrency. Let’s discuss Bitcoin and Ethereum to know how the history of DeFi began with them.


The Two Major Crypto Coins


Bitcoin


The history of DeFi is traced back to 2009, with the launch of Bitcoin as the first digital asset. Bitcoin was one of the first financial solutions that allowed users to make payment transactions using the blockchain network in a decentralized way with no single point of control.


Ethereum


The Ethereum network went live in 2015. Its foundation as a robust financial system on a decentralized platform allowed anyone to access lending, borrowing, investing, and trading opportunities. The Ethereum blockchain is identified as a default platform for the DeFi projects.


Based on the information provided above, we concluded that the idea of Bitcoin is based on the creation of financial transactions in a decentralized manner without intermediaries. The underlying technology of Bitcoin and Ethereum is an integral part of Decentralized Finance as a core element. Therefore, we can easily conclude that the history of DeFi is as old as a cryptocurrency, although it was actually developed by Rune Christensen in later years. 


Examples of DeFi Platforms and Protocols


MakerDao


MakerDao is one of the most promising decentralized lending platforms on Ethereum. Rune Christensen founded the DeFi project in 2015 that launched in 2017. 

It allows anyone to get access to loans without following KYC parameters. Lenders receive attractive interest rates, and borrowers adjust payback loan terms at their end. All financial activities are managed through smart contracts.


Uniswap


Uniswap is a decentralized exchange. It locks the digital tokens of the users with liquidity pools. A liquidity pool is a pool of digital assets locked in smart contracts and provides liquidity to the exchange. The users who add their tokens to the liquidity pool are called liquidity providers. The liquidity providers earn fees and free tokens as an incentive for providing liquidity by adding their tokens to the respective pool. 

Uniswap launched its protocol on the Ethereum mainnet in 2018. Hayden Adams founded the project.


Yearn Finance


Yearn. Finance (YFI) is a decentralized platform. It allows users to deposit their digital assets to earn interest income and maximize their earnings on digital assets through trading and lending services. 


Andre Cronje,` the prolific coder and the founder of the yearn finance, formed the yearn finance project in Feb. 2020


Others


There are many other popular DeFi crypto projects that also play a major role in creating financial applications such as lending, borrowing, investing, trading, or funding. Some of them are Aave, Synthetix, Curve Finance, Balancer, Bancor, Ox, and Kyber Network.


How Do People Earn Money With DeFi?


DeFi opens up great opportunities to access lending, borrowing, trading, investing, and more to all individuals connected to the electronic ledger across the decentralized network globally.


1. Peer-to-Peer Lending


Users can earn interest income on their digital assets by lending them to other users. DeFi platforms allow users to lend loans against crypto or stablecoins such as Dai or compound and can receive higher - interest rates than local banks. The interest rates increase manifold when the borrowing demand for digital assets increases.


The borrower can borrow funds by collateralizing their digital assets with the platform and can make money by lending it to others.


2. Borrowing Your Funds to Others


DeFi platforms let you borrow funds by accepting crypto assets of borrowers as collateral in two ways

  1. The borrower can directly borrow the digital asset from the lender on a P2P network.
  2. The borrower can borrow money from DeFi liquidity pools.


Users borrow funds from one DeFi network and sell on other DeFi exchanges. They pay back the loan to the initial DeFi exchange and make a profit after deducting the transaction fee charged by the exchange.


3. Using Stablecoins


Stablecoins are a form of DeFi coins. These coins contribute to limit the cryptocurrency volatility because the value of stablecoins stays pegged to other currencies such as the euro or dollar that bring price stability in DeFi markets. Latin Americans use stablecoins in times of uncertainty to guard their investment funds.


Users can earn astronomic money using the no-loss lottery Pool together option where one can buy lottery tickets through stablecoins such as Dai tokens, in case if one's ticket is gotten as the victor, the user will be qualified to win the prize pool. On the off chance that doesn't, these tokens roll over to the subsequent draw. Users have the option to withdraw these tokens when desired.


4. DeFi Staking


Investors can generate profit through DeFi staking. It is a process of crypto holdings with DeFi smart contracts on DeFi platforms where users lock up their digital assets, to give liquidity to that pool and get staking rewards consequently, in return.

For instance, if ETH holders stake their tokens into Ethereum 2. 0 smart contracts, they will receive additional ETH as a reward.


The Bottom Line


Decentralized finance is no longer considered a new idea. Many crypto enthusiasts have pushed it to the mainstream. We at BingX, believe in the value of decentralized finance and in the crypto market. That is why our platform is considered to be one of the leading social trading platforms up to date. Our job is to connect crypto enthusiasts with professional crypto traders, and by doing so allow them to copy the same investment in a safe, and easy environment.


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