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DeFi Explained: How to Use DeFi for All Your Banking Needs

It’s normal to have some questions about joining 🀝 the world of decentralized finance or DeFi. With DeFi, you can achieve most of the things you can accomplish using central banks.

This article will give you an explanation of the ways you can use DeFi right now to borrow, trade, spend, and more. You can read more 🧐 about the background of DeFi and how it works here; this article will focus more on what you can do with DeFi.

What Is DeFi?

DeFi, or decentralized finance, is a new way of handling financial transactions πŸ’Έ. Rather than using traditional financial institutions, DeFi transactions are handled on a decentralized network of computers πŸ–₯, often using blockchain technology. 

Defi is powered by πŸ’ͺ smart contracts and runs on the Ethereum blockchain protocols. You can find the latest analytics and rankings of DeFi protocols from DeFi Pulse.

Proponents of DeFi say it’s a more secure and efficient way of managing financial transactions. It also opens up new opportunities that were not possible with traditional centralized finance, lowering the barrier to entry for those in remote locations 🀳. 

The biggest challenge for DeFi protocols is scalability and vulnerability to cryptocurrency crimes/risk of theft. The decentralized infrastructure that makes them so resilient is also slow and expensive to scale βš–οΈ. This is a major impediment to their growth and adoption. There is also a level of risk to any new tech, and some users aren’t willing to take that risk to trade tokens or explore this new financial ecosystem.

Applications of DeFi

DeFi is an expansive πŸ’Ž and ever-growing field, with new financial applications being developed all the time to ensure decentralized alternative payment ecosystems. There is so much you can do with DeFi. Here are a few of the ways users are already leveraging this new system πŸ€”. 

Make Payments

With DeFi derivative protocol, you can make peer-to-peer payments πŸ’° without a central authority. To make a payment using decentralized finance, you have to create an Ethereum 2.0 digital wallet and put some cryptocurrency assets inside. Then, you must connect the wallet to a decentralized finance platform.

Once you have connected your cryptocurrency wallet, you can select the amount of ETH you want to send and the recipient’s address. The financial transactions will then be processed on the Ethereum 2.0 DeFi blockchain, and the funds will be transferred to the recipient’s address. Compared with sending payments in other ways, using DeFi to send cryptocurrency exchange payments won’t cost you much 🀩 in the way of a transaction fee. 

Lending

You can lend money (in stablecoin form) to others via lending platforms like MakerDAO. Borrowers can use that money to get a loan in another cryptocurrency.

Lending without the need for a bank or other financial institution is a real game changer for many people. The consensus mechanism allows you to take out loans, including flash loans, from borrowing platforms without giving out your credit score/identity. These smart contract deals can often be done at a lower interest rate πŸ€‘ than what is offered by traditional lenders or a credit card as well. 

Trading

With decentralized lending platforms like 0x, you can do cryptocurrency trading without a centralized exchange. It’s a more secure πŸ”’ and efficient way of trading crypto assets, governance tokens, and more, and it gives you more control over your trades in the crypto market.

Insurance

DeFi insurance is a new type of insurance that uses blockchain technology to create a more efficient and decentralized system. DeFi insurance allows policyholders to access insurance contracts πŸ‘©β€πŸ’» and providers without involving a third party. That can lead to lower premiums and faster payouts for policyholders. One decentralized insurance protocol built on Ethereum 2.0 already in the works is Nexus Mutual.

Other Applications of DeFi Digital Finance

Again, it’s best to think of DeFi as a regular financial institution. You can use it for a lot of the same things you can do at a bank 🀩. This includes all of the above as well as:

  • Storing crypto wallets and other synthetic assets
  • Liquidity mining (we’ll explain this a bit more in a moment)

DeFi Platforms

Decentralized Finance (DeFi) platforms are digital platforms πŸ‘©β€πŸ’» where you can do all the things described above. DeFi platforms are built on decentralized infrastructure for decentralized exchanges.

The most popular DeFi platforms include MakerDAO, Compound, and Dharma. These digital assets platforms have built a strong community of users πŸ’ͺ, developers, and market makers who are continuously innovating and expanding the range of services available for blockchain transactions.

Yield Farming on DeFi Platforms

DeFi platforms require liquidity pools to keep running. If you buy or store crypto on a DeFi platform, you are already a liquidity provider 😱! This is because you’re supplying crypto tokens to the liquidity pools, which do not require intermediaries to work. This is a form of investing, and yield farmers can therefore receive returns on their investments. 

Ready to Use DeFi Digital Finance?

As you can see, decentralized finance platforms on the Ethereum DeFi network offer many advantages over traditional centralized counterparts. These financial instruments are more accessible, resilient, and transparent than normal banks, according to some experts πŸ‘Œ. They also offer a wider range of services and a more democratic governance model 🀩.

Despite these challenges, decentralized finance techniques have the potential to revolutionize the financial system. They offer a more accessible, resilient, and transparent alternative to traditional financial platforms, and they can serve to level the playing field on a global scale 😎. 

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