DeFi for Beginners

Ever heard of DeFi 👂? If not, DeFi is short for “decentralized finance.” It refers to the shift from traditional, centralized exchanges to a (yep, you guessed it) decentralized network based on blockchain technology. If that sounds confusing, don’t worry; this DeFi for beginners article will clear things up 🤓. 

From decentralized lending protocols to tokenized BTC, the DeFi ecosystem is impressive and vast. As of mid-2022, it consists of an expansive network of integrated protocols and financial instruments and boasts over $13 billion worth of value locked in Ethereum smart contracts 🤑. Want a piece of that very big pie? Let’s talk a bit more about DeFi for beginners and how some people are using the DeFi system to make a lot of money. 

What’s DeFi All About?

Decentralized finance is basically a catch-all term for a growing ecosystem of financial protocols and applications built on Ethereum. If you aren’t sure what Ethereum is, check out our article on this important player in the crypto asset world 👩‍💻. 

DeFi has proved useful to everyone from curious users to massive institutions and market makers. The defining characteristic of DeFi applications under this decentralized governance system is that they are built on Ethereum smart contracts, which has significant benefits. 

DeFi and Ethereum Smart Contracts

What is an Ethereum smart contract, you ask 🤔? Well, these self-executing contracts live on the Ethereum blockchain, which acts as a smart contract platform. Users can program these contracts so they shoot off financial transactions under specific conditions. This enables DeFi applications to run just like other digital assets: in a completely decentralized manner and even sans human intervention. 

That’s right; there’s no need for a centralized third party like a bank or financial institution in the real-world finance industry 💰. This is very much the central (yes, yes, pun intended) theme behind decentralized applications in general, including whatever digital currency makes up your crypto wallet balance.

DeFi and the Ethereum System

Because DeFi applications are built on Ethereum, they can interact 🗣 with each other using Ethereum’s decentralized infrastructure. This allows DeFi protocols to be “stacked” on top of each other, allowing for new financial technologies and methods of financial activity.

For example, a lending platform built on Ethereum could be integrated with a stable coin. Together, they could create a decentralized lending pool that offers collateralized crypto loans with minimized price volatility.

The DeFi ecosystem is still in its early stages, and the applications that have been built to date are just a small slice of what’s possible. As the ecosystem continues to grow and mature, we expect to see an explosion🌋of new and innovative DeFi protocols and applications. Industry experts hope this will change the way we think about traditional finance altogether. 

What Are the Benefits of DeFi?

DeFi protocols and applications offer a number of benefits compared to traditional financial services. Here are some of our favorites. You might notice that lots of these are typical of decentralized finance applications in general. 

DeFi and Accessibility

One of the biggest benefits of DeFi is that it is accessible to anyone with an internet connection. Unlike traditional financial services, which are often only available to people in developed countries, DeFi protocols can be used by anyone in the world 🌎. This makes DeFi and crypto exchanges in general a powerful tool for financial inclusion, especially when compared to the hurdles of traditional banks, exchange rates, and financial markets.  

DeFi and Security

Traditional centralized applications can often be susceptible to hacks and fraud 😡. As we mentioned before, DeFi protocols are built on Ethereum smart contracts, which are immutable and transparent. This means that DeFi applications are considered by some to be more secure than your average lending services, although some have called the security of the blockchain industry into question recently. 

DeFi and Privacy

DeFi protocols offer users a higher degree of privacy than traditional financial services. For example, many DeFi protocols allow users to transact using an assigned code rather than their personal information. This makes DeFi an ideal choice 👌 for users who value privacy and don’t want to provide personal information to a centralized entity.

What Are the Risks of DeFi?

You knew it was coming; there are rarely benefits without risks in the crypto space and beyond. Despite the benefits of DeFi and the blockchain space, there are also a number of risks associated with this nascent technology.

DeFi’s Complexity

The DeFi ecosystem is still in its early stages. Unsurprisingly, DeFi DApps (protocols and applications) are often complex and difficult to use, tailored to the experts who created them. This can be a barrier to entry for many users, and it also increases the risk of user error. Hopefully, as DeFi expands, its finance protocols will become more accessible to the average computer user 👩‍💻. 

Lack of DeFi Regulation

Because DeFi is a decentralized technology, it is not subject to the same regulations as traditional financial services. This lack of regulation on everything from daily transactions to overall oversight of blockchain networks could be a risk for users, some experts argue. A great example of this is the popularity of cryptocurrency exchange assets with the criminal underground (talk about a population that values privacy 🤫).

DeFi and Web3

Is DeFi the future of finance? Only time will tell. In the meantime, you can keep up with decentralized prediction markets, crypto-compatible wallets, governance tokens, and more with the Ian Corzine newsletter. Sign up ✍️ today!