What is Defi? Is it worth it?Description of decentralized finance

In a world where centralized finance is struggling, decentralized economics is in control. This exciting new development, also known as DeFi, consists of a variety of applications running on blockchain technology.

These applications are intended to take control of third-party intermediaries and bring them back into the hands of users. As such, DeFi can help solve serious problems in traditional finance. But what is DeFi encryption? And is it worth your time? (Especially in the cryptocurrency epidemic where everyone seems to be investing in such projects).

Weigh the value against hype.

Basics of decentralized finance

Decentralized finance, or DeFi for short, is a collective term for a series of projects aimed at bringing financial services to the blockchain era. This includes decentralized exchanges, margin trading, prediction markets, and stablecoin. DeFi has grown significantly in recent months, with a value of over $ 75 billion fixed to DeFi contracts at the time of writing.

Unlike centralized institutions, DeFi provides users with a fluid, global financial system without intermediaries, transaction fees, or long certification procedures. Instead, DeFi participants conclude a “smart contract.” This is a self-executing code that automatically monitors whether the terms and conditions of the contract between the buyer and the seller are met.

In addition, the surge in interest in decentralized finance can be attributed to several other factors.

• Ease of use and accessibility of DeFi applications
• There is no intermediary to build a fairer financial system and reduce fees
• A single point of failure does not lead to increased security
• Faster application development
• All transactions are visible and transparent to the entire network

What can you do with DeFi?

The broad concept of decentralized finance covers all applications, from decentralized exchanges to lending protocols. DeFi is still in its infancy, but there are already plenty of pioneering projects built on various blockchains. Let’s take a look at some of the possibilities DeFi offers and the types of operations that can be processed within this ecosystem.

Decentralized borrowing and lending

Imagine stepping into the world of free finance, where there is no recheck to approve a loan. This is exactly DeFi borrowing. As with centralized institutions, you can borrow assets using the DeFi lending protocol. But instead of physical funding, you can secure a crypto loan in just a few minutes. By doing so, the lending process is carried out through peer-to-peer lending and does not require third party involvement.

Compounds are a prominent example of a blockchain-based protocol that allows users to lend or borrow cryptography to other supported assets as collateral. Decentralized lending has also spawned another cryptographic practice called harvest farming. In this case, the lender borrows the asset and receives a reward in the form of interest.

transaction

Decentralized exchanges or DEX are the main destinations for blockchain-based trading operations. As such, DEX is a platform (P2P) for trading digital assets directly between participants, with no third party involvement or partial transfer of asset management. According to Statista, Uniswap and Sushiswap are the largest DeFi cryptocurrency exchanges and have the largest market share. Uniswap also allows users to add new tokens for trading.

DeFi Derivatives

Given its role in the mature traditional financial system, it’s not surprising that derivative contracts are gaining momentum in the crypto finance market. DeFi derivatives and protocols have created a lot of buzz and are rapidly becoming essential in crypto finance as well.

SynthetixFor example, it is one of the most established protocols for DeFi derivatives. This collateral pool model allows users to exchange some synthetic assets directly for other assets via smart contracts without the need for counterparties. This mechanism solves the liquidity and slip problems inherent in decentralized exchanges.

This set of operations is also transformed into a set of unique DeFi applications that offer unparalleled opportunities for DeFi participants. Let’s take a closer look at these.

What is the most popular DeFi application?

Many groundbreaking projects are underway in the DeFi space. Still, I curated one of the well-known ones and dumped them into a concise list that included:

• Decentralized Exchange (DEX)
• Stablecoin
• Loan platform
• Prediction market
• Wrapped bitcoin

DEX

A decentralized exchange is a peer-to-peer marketplace that acts as an alternative to CeFi’s traditional currency exchange. The main difference is that, by the nature of the blockchain, there is no fraud, even though there is no intermediary to monitor the transaction. DEX allows users to exchange one currency for another, such as trading from US dollars to cryptocurrencies.

Stablecoin

These are cryptocurrencies that lock market value to a relatively stable underlying asset. The latter can include banknotes (statutory assets) or other cryptocurrencies. Their value can also be linked to gold and oil. Stablecoin exchange rates are less volatile than regular cryptocurrencies. Tether is the most popular stablecoin.

Credit platform

As I’ve already mentioned about lending DeFi platforms, these allow users to borrow crypto loans. However, instead of going through a long-term and in-depth approval process, DeFi participants are eligible for crypto loans without the use of intermediaries. As collateral, the user must deposit crypto or statutory assets. The lender receives the money with interest, but the borrower regains the collateral after repayment.

Prediction market

A decentralized prediction market on the blockchain is a betting place for exchange transactions that gives users the ability to predict future outcomes. In the DeFi Prediction Market, anyone can bet on an event, regardless of status or location. In this case, the betting process is facilitated by using smart contracts.

Wrapped Bitcoin (WBTC)

Wrapped Bitcoin is a DeFi-specific ERC20 token backed up 1: 1 with Bitcoin. Therefore, this is an Ethereum token that represents Bitcoin (BTC) in the Ethereum blockchain. It is not the Bitcoin itself, but a separate ERC-20 standard token designed to track the value of Bitcoin in the Ethereum ecosystem.

What are the main drawbacks of DeFi?

With no accessibility, ease of use, secure transactions, and no chargeback, DeFi is a fascinating opportunity. However, like other young technologies, decentralized finance has some drawbacks.

Requires third party audit

The smart contracts that underlie DeFi can be susceptible to exploits. To avoid tampering, do not include gray zones in your code. Therefore, it is necessary to scrutinize smart contracts to identify potential vulnerabilities before deploying them on the blockchain. Also note that once connected to the mainnet, the immutable nature of the blockchain prevents smart contracts from being modified.

Liquidity

All marketable assets, including cryptocurrencies, require liquidity. Low liquidity indicates that market volatility exists and cryptocurrency prices are skyrocketing. Also, most DeFi projects are touted as liquid, but there is no guarantee.

Anonymous

Anonymity is a double-edged sword in the DeFi market and can bring both unparalleled benefits and painful surprises. Like regular users, malicious attackers benefit from the element of anonymity and go unnoticed. Therefore, increased security can also encourage fraudulent and malicious operations.

Scalability

Blockchain as a whole is well known for its limited scalability options. DeFi scalability is directly related to high transaction throughput and the ability to support future growth. DeFi applications can be extended, but adding traction can compromise the security or decentralized nature of DeFi.

Still, despite some obvious obstacles, trade-offs are accepted to unleash a unique bunch of crypto and blockchain opportunities.

Therefore, DeFi solves the following problems of traditional banking.

• Inefficiencies – Centralized transactions are costly, time consuming, and insecure.
• Poor access to banks – Approximately 1.7 billion adults remain undeposited in banks.
• Opacity – Centralized institutions hide their exposure to risk from the public, resulting in limited or no transparency.
• Centralized management – ​​an oligopoly system that imposes high fees.

The hottest ticket in cryptocurrency

DeFi is an open and global financial system for the digital age. DeFi allows you to regain control and visibility of your assets instead of the opaque, legacy, highly centralized banking.

But like other new technologies, decentralized financial systems need to be refined in terms of safer infrastructure (vulnerable smart contracts) and scalability. So what is the verdict?

DeFi gives investors access to new types of assets, lowering costs, raising interest rates and better controlling future finances. Still, due diligence must be paid to consider possible risks and distinguish between long-term DeFi platforms and cash grabs. If you are considering launching your own DeFi application, be sure to perform a thorough audit to prevent possible fraud.