Your Definitive Guide to DeFi
By Space Coast Daily // December 12, 2022
Decentralized finance, or DeFi, is a new yet interesting financial system based on blockchain technology. Being developed with the goal of replacing the traditional finance system, DeFi uses automated programmes, which are responsible for tasks previously made by banks in traditional finance or TradFi.
While DeFi is still in its development stage, it seems that it will become a strong competitor for TradFi, which allows users more control over their funds.
That is because DeFi is decentralized, allowing users to make payments within seconds, without intermediates, while also boosting the security of transactions. In addition, DeFi allows users to have complete control over their finances instead of a centralised system, which refers to banks being in control.
As a result, DeFi has gained immense popularity. Many people want to enter the space thanks to a variety of benefits, but it could also be confusing for many. And even if you entered the space, you may consider how to boost your experience. That is because there is a lot of information to unpack when it comes to DeFi.
Once used wisely, DeFi applications and platforms can become powerful tools not only for transactions but also allow users to enjoy investment opportunities. It is sim to become overwhelmed with information available on the Internet, so we make this guide to help you explore all you need to know about DeFi for beginners in a structured and simple way.
What is Decentralised Finance (DeFi)?
Decentralised Finance, or DeFi for short, is a term used to describe an ecosystem of financial applications developed on blockchain networks. In fact, DeFi also refers to the movement with the goal of creating an open-source, permissionless, and transparent financial service network. This system is developed to be available to everyone and work without any central authority.
DeFi puts users in the centre of the ecosystem, allowing them to have complete control over their assets and interact with this ecosystem via peer-to-peer (P2P), decentralised applications (DApps). The main pros of DeFi are offering easy access to financial services, especially for those isolated from the traditional system.
Another benefit of Decentralised Finances refers to the modular framework it’s built upon, having interoperable DApps on public blockchains. DeFi is believed to have immense potential to develop entirely new financial markets, products, and services which can even replace traditional finances.
What are DeFi Benefits?
One of the key differences between traditional and Decentralised finances is that the traditional ecosystem relies on institutions like banks to work as intermediaries and courts to provide arbitration. The DeFi ecosystem doesn’t need any intermediaries or arbitrators.
That is because DeFi is baked into the blockchain, where the code specifies the resolution of every possible dispute, while users have entire control over their funds at all times. This can also reduce costs associated with offering and using these products, providing a more frictionless financial ecosystem.
Thanks to blockchain technology as a base of DeFi, the system doesn’t have single points of failure. All the information is recorded on the blockchain ledger and then spread within thousands of nodes, which makes censorship or the potential shutdown of the entire service almost impossible.
Another point for consideration of DeFi is the fact that it is an open ecosystem and the ease of access for those who otherwise wouldn’t have access to any financial services. As we mentioned, the traditional financial system needs intermediaries who make a profit, making their services usually lack locations in low-income communities. In contrast, DeFi is associated with fewer costs, allowing low-income groups to also benefit from a wider range of financial services.
DeFi Use Cases
One of the most well-known DeFi apps available on Decentralised Exchanges (DEXs) is Binance DEX. This is a platform specially developed to allow users to trade digital currencies without requiring a trusted intermediary (the exchange) to manage and control their funds.
That is because all trades are happening within these platforms between user wallets through smart contracts. For basic DeFi transactions, you can use smart wallets such as mymerlin.io.
Some exchanges, called Automated Market Makers (AMMs), use liquidity pools to make transactions without needing a counterparty to match each trade. You can check Uniswap and Pancake Swap as the two most popular and bright examples.
Decentralized exchanges require less maintenance work and management, which means lower trading fees than centralized exchanges.
Borrowing and Lending
One of the most popular app types in DeFi is lending protocols. Being decentralised and open, these applications offer many benefits over the traditional credit system. These include instant transactions, no credit checks as well as the opportunity to collateralise digital assets.
Since lending and borrowing applications are based on the blockchain ledger, they minimise the amount of trust needed and provide the assurance of cryptographic verification ways. There are several DeFi lending marketplaces placed on the blockchain that reduce counterparty risk. This makes the borrowing and lending process cheaper, faster, and available to all groups of people.
Monetary Banking Services
As you can guess, DeFi applications are designed for the financial sector. Therefore, monetary banking services are the most obvious use among all of them. This now includes the issuance of stablecoins, mortgages, as well as insurance.
As the blockchain industry grows rapidly, there’s an increased need for creating stablecoins. These are digital assets typically pegged to real-world assets that can be easily transferred.
Since prices of digital assets can fluctuate rapidly from time to time, decentralised stablecoins can be used on a daily basis as digital currencies that are not issued and monitored by any of the central authorities.
DeFi is becoming extremely popular. Being decentralised, fast and secure, these ecosystems may soon replace traditional systems. However, it is vital to know all DeFi opportunities to understand how to benefit from using it. In addition, consider using apps and services, like Mymerlin.io, to help you boost your DeFi experience with the help of services specially designed for DeFi trading.