What is DeFi? DeFi is a rapidly growing financial sector based on the cryptocurrency and blockchain platform. The large volume of cryptocurrencies today has created a decentralized store of value on the Internet, completely unrelated to the currencies owned by governments.

DeFi operates like a traditional bank, providing services from lending, borrowing, secured, and direct transactions. The special feature of DeFi is its decentralization and is not controlled by anyone or any institution.

In the year 2020, the world witnessed the rapid growth of DeFi. From $275 million in collateral on the system in 2019, by February 2020, DeFi collateral rose to $1 billion. In December 2020, DeFi saw a staggering record increase to $17.5 billion in multi-collateral.

These tremendous growth numbers demonstrate the market’s great interest in cryptocurrencies. So let us find out what DeFi is and why it is so attractive.

Source: DeFi Pulse

What is decentralized finance (DeFi)?

DeFi is decentralized finance, leveraging the influence of Blockchain’s decentralization and transparency to create an open finance environment. In this system, everyone can participate without being controlled by middlemen or the concentration of powers, authority, and control.

DeFi always comes with Non-Custodial.

No one invented DeFi, but the Ethereum blockchain is the base of DeFi to develop its applications. The blockchain platform was created by Vitalik Buterin. The world’s first and largest DeFi application is MakerDAO, founded by Rune Christensen.

Decentralized Finance main features

Global access

DeFi is open source, so anyone with an Internet-connected device can easily access it.

Interactive ability

DeFi is powered by blockchain so it is highly scalable, diverse, and interoperable.

Personal privacy

CeFi asks people to provide personal information. However, no need to verify user identity on DeFi.

DeFi dApps restrain the participation of third parties so that the user is actually the sole custodian of the crypto asset.

Information transparency

Market performance data will be publicly and equally displayed to all system participants.

The advantages of DeFi

• Real decentralization: no censorship; Everyone can participate in the system; reliable platform
• The transaction is fast and low cost.
• Undetectable contracts
• Users have full control over their cryptocurrencies and transactions.
• Increased transparency: minimizing risks arising from personal interests or misinformation
• In the e-finance environment, you don’t need any middlemen. The open-source code system automatically adjusts, assigns the dispute resolution plan.
• Blockchain stores billions of data on the earth using thousands of complicated code. Because of the newness and complexity of the system, agencies and governments are currently unable to control or censor all transactions on DeFi.
• For the poor, rural, low-income, or even those banned from traditional financial systems, DeFi offers them the opportunity to easily access financial transactions. They even earn money on DeFi for a better life.

How DeFi works

The DeFi regulations are automatically encrypted. Smart contracts bind users’ transactions. All are designed on the blockchain. Therefore, DeFi dApps operate automatically without any control from third-party.

Because smart contracts are publicly available on the blockchain, all users can transparently view and verify. All trading activities are also made public. However, due to privacy issues, identity on transactions will be recorded with a pseudonym by default.

How to use DeFi?

Lending market

Loans are DeFi’s favorite feature. Users simply deposit their crypto assets and make a profit when someone else borrows their property at high-interest rates. Similar to banks, users can monetize interest when lending money. DeFi eliminates the role of a bank intermediary. A smart contract connecting the lender and the borrower is a binding condition. Through the smart contract approved, the two parties comply with the loan terms and interest rate.

One famous platform is Compound. Compound sets interest rates by algorithm, so if the demand for crypto loans is higher, interest rates will be pushed up proportionally.

Decentralized exchange (DEX)

Online exchanges help users exchange between different currencies. USDT against BTC or ETH with DAI. DEX is a popular exchange type. Thanks to the decentralization feature, DEX participants own a private token, authorized to transact directly on the blockchain. The exchange does not have the authority to manage user transactions.

Stablecoin

The DeFi has a Stablecoin platform that serves to ensure stability and avoid the fluctuation of price. Some dApps will set the exchange rate for the value of a stablecoin for a specific currency, such as dollars or euros.

Insurance

The abundant cash flow on the system has led to an increase in centralized platform hacks and mining as well as DeFi. As a result, market participants need to use decentralized insurance products.

Decentralized insurance acts as a safety barrier in the DeFi. By using wallet insurance to cover smart contracts, your cryptocurrencies are protected from an error or hacker attack. DeFi Insurance offers peace of mind for crypto investors.

Some limitations of DeFi

• Performance: Blockchain applications have not yet been optimized.
• User error: Since there is no intermediary arbitrator on the DeFi platform, users are solely responsible for their transactions. Only users can allow, suspend or stop their transactions. Limiting system bugs by users is quite difficult.
• User experience: DeFi has to bring more obvious interests to convince people to stay loyal for a long time.
• Complex market: Users find it difficult to find a suitable app because the decentralized financial ecosystem has so many options.

Conclusion

By incorporating blockchain technology into traditional financial operations such as payments, borrowing, or investing, DeFi is a pioneer in creating a new form of electronic financial transactions. While it’s a compelling idea, not everything benefits from decentralization. Finding the use cases that best match blockchain’s properties is crucial in building a useful stack of open financial products.

If successful, DeFi will take power from large centralized organizations and put it in the hands of the open-source community. Whether that will create a more efficient financial system will be decided when DeFi is ready for mainstream adoption.

Overall, we think DeFi is interesting and offers many opportunities for users to discover and benefit from it. You can set up your own funds and assets then make a high profit. However, you need to be persistent and learn about cryptocurrency.

Here we provide you with all information about the electronic money system, the safest way to enter the market to save you time and effort in your search and reduce your risk. Now is a good time to start learning about this exciting new industry, so you can keep an eye on how it evolves.