Looking to get involved in the world of cryptocurrency 🧐, but not sure where to start? Look no further than the world of “DeFi” (decentralized finance)! From lending and borrowing platforms to stablecoins and tokenized BTC, the world of DeFi offers a wide range of financial services built on the Ethereum decentralized blockchain. In this article, we’ll give you a crash course on what DeFi is and how you can get started 🤩.
What Is DeFi?
DeFi applications are built on the Ethereum system. It uses smart contracts to enable a wide range of financial interactions 💸, including peer payments, lending, borrowing, trading, and investing. It does all this without the need for centralized finance providers.
Because DeFi applications are built on the Ethereum blockchain technology, these crypto-assets are available to anyone with an internet connection and an Ethereum crypto wallet. This allows anyone in the world 🌍 to access the same financial transactions that have traditionally been available only to those in developed countries with stable financial systems.
As you might expect, DeFi’s makers intend for this system to be a replacement for the traditional financial institution (e.g. your neighborhood bank). However, DeFi goes beyond this: the financial applications software developers offer through DeFi are impossible with conventional banks/conventional checking.
The Pros and Cons of DeFi
Like any decentralized exchange, DeFi has its pros and cons 🤔. Here are the most notable ones you should be aware of 👀 before you jump into the DeFi pool.
The Pros of Defi
As we already mentioned, DeFi allows anyone in the world to access 🤳 the same financial services that have traditionally been available only to those in developed countries with stable financial systems. This could literally be life-changing for some folks.
Another benefit of DeFi is that it enables new kinds of peer financial transactions that are not possible with traditional finance. For example, DeFi applications can be used to create “collateralized debt positions” (CDPs). CDPs are collateralized loans that allow you to borrow money against the value of your Ethereum tokens. Neat, right 👌?
Finally, DeFi applications are built on the Ethereum public blockchain, a transparent and censorship-resistant platform 👏. You may know Ethereum from its currency, ETH, which appears in your friendly neighborhood crypto exchange.
Because of the decentralized nature of the blockchain ledger system, DeFi applications are available to anyone in the world and they cannot be shut down by a government or other centralized institutions. Bitcoin and Ethereum, including some of the world’s first exchange-traded products under this digital finance: crypto markets. New offerings like non-fungible tokens are on the rise, and the market is only going to get bigger 😲!
The Cons of DeFi
The biggest risk of DeFi is that it is still a new and experimental financial technology. While the Ethereum blockchain platform is robust and secure 🦾, the decentralized applications built on top of it are still in their early stages of development and are not yet battle-tested. This means that there is a risk that some DeFi applications may not work as intended. Even worse, they may be vulnerable to cryptocurrency crime or other security breaches risking consumer protections.
Another risk of this Decentralized Finance ecosystem is that some applications may be used to engage in illegal or cryptocurrency crime. For example, some DeFi applications may be used to launder digital tokens or to fund terrorist activities 😬.
Finally, with this decentralized finance, DeFi applications are subject to the same volatility as cryptocurrency spot prices. This means that the value of your flash loan, investment in the native token, or other compound finance activities may go up or down like a roller coaster 🎢. You may not be able to repay your loan if the value of your investment decreases. In that way, it’s very similar to stock exchanges.
Examples of DeFi in Action
The most popular examples of DeFi blockchain platforms are Maker and Compound. Both of these applications in the crypto universe are new ways to get loans using crypto holdings. Let’s talk about those a bit here.
Ever wanted a quick loan without credit cards or a credit score hit 🤓? This is a decentralized finance platform that offers flash loans in the form of digital assets. Loans are secured by cryptocurrency deposits and backed by the Ethereum 2.0 network.
The compound is a decentralized finance platform that offers loans in digital assets like cryptocurrency. It’s currently the second-largest decentralized lending platform (other popular examples of DeFi platforms include Augur, 0x, and MakerDAO).
DeFi Swap is one of the new DeFi protocols designed to offer the best place to swap and do crypto yield farming at the best available rate 👩💻. DeFi swap also makes it possible for liquidity pools (amounts of crypto locked into specific smart contracts) to generate their annual percentage yields. You can think of the latter as the decentralized blockchain version of a certificate of deposit.
How Can I Use DeFi as a Regular Person?
The great thing about DeFi blockchain network is that anyone can use it! You don’t need to be a financial expert or have a lot of digital money 📲 to get started. There are many ways to do blockchain transactions and conduct decentralized finance techniques with DeFi as an amateur.
For example, you can:
- Borrow or lend money using a decentralized lending platform
- Trade crypto tokens on a decentralized exchange
- Earn interest on your crypto by staking it or lending it out through their lending protocols/currency exchanges with minimal transaction fees
- Use a decentralized stablecoin to store your money 💰
The possibilities with decentralized finance applications are endless! If you’re new to DeFi, the best way to get started is to explore 💃 the various decentralized platforms and see what interests you. From there, you can learn more about how each platform works and how you can use these decentralized finance applications to your advantage.
What Is the Future of DeFi Financial Instruments?
There are some DeFi competitors in the crypto market, but DeFi is the only one that offers a wide range of financial products (such as cryptocurrency assets) at extremely competitive prices. DeFi has the potential to revolutionize the financial system by making it more accessible, efficient, and transparent. While the future of DeFi is uncertain, the potential is great. However, DeFi is still in its early stages of development, and it remains to be seen whether it will be able to live up to its potential 🤑.
Want to keep up on more Web3 news? Get the latest updates on that exciting new native coin, cryptocurrency tax forms, crypto trading, and more via the Ian Corzine newsletter.