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A Guide to Decentralised Finance (DeFi)

Many experts call DeFi (decentralized finance) the future of finance. DeFi aims to become a decentralized financial system that offers new opportunities for people to invest, loan and trade without banks, governments or corporations acting as a middleman. DeFi has many potential advantages over traditional centralized systems like the stock market, including lower fees and more transparency into what’s happening on the network. This guide will walk you through everything you need to know about DeFi before investing your time and money in it!

The terms decentralized finance, or DeFi, refer to finance which operates in an organized way without the traditional central intermediaries. DeFi provides a transparent means of handling a number of financial services – like investing, insurance, swapping and loans – more efficiently and transparently. The currently most commonly used application of decentralized finance is online transactions via DeFi cryptocurrency.

The advantages of the DeFi ecosystem extends beyond online banking transactions, various other financial services are already supported by smart contracts e.g.: lending, insurance, saving plans, exchanges, loans and retirement plans. 

 DeFi ecosystem

How Does DeFi work?

DeFi offers alternatives to bank institutions, CFD brokers or exchanges. DeFi Systems achieves distributed consensus by applying smart contracts on blockchains such as Ethereum or Avalance. Developers write smart contracts that perform specific operations that can be performed only if they meet certain conditions. The goal of DeFi is often to allow more people to access financial services or to receive better interest rates.

Smart Contracts and Decentralzed Ledgers

The term Smart Contracts can be misleading as they are neither contracts nor smart, but can instead be seen as code that is run on a blockchain. These programs can then allow self-executing agreements between two or more parties that run when certain conditions are met. DeFi enables people to create these programs easily and securely. A decentralized ledger can then be used to verify the smart contracts, eliminating the need for a bank or other central institution. A decentralized ledger is a decentralised online database that allows users across the network to validate transactions.

Decentralized Exchanges (DEXs)

A decentralized exchange (DEX) is a cryptocurrency marketplace where transactions occur directly between users. The goal is for the transactions to be conducted without the involvement of any third party middleman. A decentralized exchange typically requires a crypto wallet, such as Metamask, where the user’s funds are stored. This is in contrast to centralized exchanges like etoro, where the funds can be stored in a wallet within the exchange.

The current state of DeFi

Decentralized financing is still in a very early stage of its development. In 2020 DeFi’s contracts have totalized $10 billion and are expected to grow from $33 billion at the start of 2021 to $93 billion in the ending month of 2021. DeFi is still plagued by infrastructure glitches and hacking issues, and a lot of fake de-fi sites exist. This open and relatively distributed nature of the decentralized banking ecosystem may also pose serious challenges for existing financial regulation. 

Conclusion

Decentralized finance (DeFi) could well be the future of finance. With its use of smart contracts on the blockchain, it can disrupt traditional banking and credit card companies by providing more efficient, decentralized transactions with lower fees. The potential for DeFi to revolutionize our world has many people predicting that we might be living in a “post-capitalist society” someday soon. What do you think the future hold for decentralized finance? Will this industry change how we live or will it just play out as another fad?

DeFi Q&A

What is DeFi?

DeFi stands for Decentralized Finance which means that it enables transactions between users with no intermediary involved. A single DeFi platform may contain many different types of functionality in the form of decentralized applications or Dapps.

Is decentralized finance secure?

Decentralized financial platforms are designed to store the data in a way that makes it effectively impossible for anyone on or off the platform to alter or remove data once it has been written. However, there have been many cases of DeFi platforms being hacked.

How are DeFi platforms built on blockchain technology?

DeFi platforms are based on decentralized blockchain technology. This means that all transactions are irreversible and do not require the involvement of a third party for verification, execution or settlement purposes.

How is DeFi different from traditional finance?

Traditional financial institutions provide payments & loans to customers but they also serve as middlemen who need to be paid for the transaction to go through. DeFi platforms sometimes do not charge any fees on transactions and payments as they are handled by blockchain technology, although transaction fees can still exist fom miners or nodes.

What are stablecoins?

Stablecoins are cryptocurrencies that maintain a fixed value relative to another asset, such as gold or fiat currencies like US dollars. Some DeFi platforms use their own version of stable coins called DeFi stablecoins. 

What is UNI?

The UNI token was created by DEForm project One Nation Money. It has been developed to simplify access to Deformat for everybody around the world by offering diversification of DeFi products. The token itself will act as a gateway to access all the features that One Nation Money has built specifically for DEForm

What is crypto borrowing and lending?

One attractive aspect of DeFi is peer-to-peer borrowing and lending of assets. Using Smart Contracts and Dapps, user’s can securely borrow and lend funds from each other, often to considerably more attractive interest rates than the traditional financial institutes offer.

What are crypto prediction markets?

Prediction markets are DeFi-based technologies that let people predict and bet on certain future event results. 

What is a stablecoin?

Stablecoins are cryptocurrencies that maintain a fixed value relative to another asset, such as gold or fiat currencies like US dollars. Some DeFi platforms use their own version of stable coins called DeFi stablecoins. 

One example of a stablecoin is DAI (CRYPTO:DAI ) Issued by MakerDAO an open-source project from the Ethereum blockchain this is pegged to the United States dollar in the US. DAI is purposefully co-written with Ether, allowing for stabilization of values of DAI even as Ether values fluctuate. The USDC stablecoins are supported by US dollar reserves held in an authorised bank account but its collateral is centralised, unlike the DAX.