DeFi-Decentralized Finance shouldn’t be a strange term for the huge fans of cryptocurrencies. This solution has such a strong relationship with the financial disruption that has happened since 2008.
Although we have been seeing these disruption acts for 13 years, the DeFi development services have slowly grown, mostly due to adoption problems. Many conservative parties do not want to embrace the solutions offered in the DeFi system simply because they are not familiar with the latter.
Even those who have understood the basics are still weighing the benefits over the loopholes. Well, if we are talking about the risks of using this kind of solution, everyone will get the bigger portions since we can increase the risks for something that we don’t know.
On the other hand, we can minimize the risks and maximize the potential when we know more about decentralized finance and its underlying solutions. So, let’s learn more about it.
1. What is DeFi?
DeFi stands for “Decentralized Finance.” In a nutshell, it is a characteristic, solution, or vessel project that focuses on disrupting conventional financial solutions.
DeFi is backed up by blockchain technology, using smart contracts to replace the existence of middlemen.
As we know, in traditional financial services, intermediaries hold an important role in moving assets. It is not exaggerating to say that asset owners do not have 100% control of their assets. But with the defi crypto, there is no need to rely on intermediaries since their jobs are replaced by smart contracts.
Smart contracts’ main task is to automate the agreements and execute them when the parties meet the conditions.
The protocols in the decentralized finance system are built on decentralized blockchain networks. Since there’s no intermediary, there is no need to go through such complicated processes to procure many financial services such as lending, borrowing, and other activities.
When it comes to the blockchain, the most common blockchain to back most of the Defi solutions today is Ethereum.
Besides Ethereum, there are some public networks that also provide the perks in security, scalability, speed, and fees.
DeFi is the actualization of the original Bitcoin crusade. It is for everyone, regardless of their social status and background. Everyone has the same equal opportunity to transact with other people, regardless of borders.
On the defi project platforms, one can have full control over their digital asset. There are no intermediaries or other third parties who can tamper with their rights to manage the assets. You will get direct access just by creating your digital DeFi wallet.
2. How Does DeFi Work?
DeFi-decentralized finance, explains itself by its name. Since it is decentralized, there are no intermediaries who process and govern the financial transactions between the financial services and their clients. The users are using the DeFi ecosystem with software called D’Apps, or Decentralized Apps.
These apps have different functions and features. Most of them are backed by Ethererum, although other solutions also use different alternatives to the blockchain. Unlike traditional banks, one would not need to go through complicated registration to open an account.
On this DeFi platform, there are many financial activities that can be conducted, such as lending, borrowing, exchanging, trading, saving, and so on.
You will not need to deposit money in a bank to use the DeFi network. As you deposit your money, you will be pledged to the Ethereum cryptocurrency. It is also possible to create your own tokens based on the Ehtereum. However, different tokens can have different values.
At the moment we wrote this post, there were hundreds of defi development applications that we could find on the net, from loans to exchanges. They are operating on blockchain technology. As mentioned, there is no third party who is involved in the particular transaction. Thanks to the absence of intermediaries, the fees are at a minimum or zero.
Since it is non-custodian, the users can keep custody of the crypto assets. In a nutshell, the asset owners will have full control over their very own assets.
3. What are Some of the Leading DeFi Protocols?
When we are talking about DeFi protocols, there are numerous successful projects which we are not able to expose all of them in one single post. At the moment we wrote this post, there were over $30 billion in assets currently locked in DeFi ecosystems. That is to reserve the clients’ right to maintain and manage their valuable assets without any hassle or fuss.
One of the most leading DeFi protocols is Compound Finance, which enables users to lend and borrow within a P2P system. It is an open-finance platform where they offer crypto-asset owners the opportunity to lend to gain enormous yields on an annual basis.
Compound Finance is one of the most successful lending platforms in the DeFi ecosystem. The project is a lending protocol backed by the Ethereum blockchain. This allows the users to gain interest by lending out their assets. Compound users will earn good interest by depositing their cryptocurrencies to the platform.
The token of Compound is $COMP.
The compound is one of the tips of the iceberg. Here are the other DeFi protocols that are worth watching:
Decentralized Exchanges
Swapping tokens
Stablecoin
MakerDAO is a decentralized autonomous organization.
4. How to Get Started with DeFi
Start using the DeFi service as a customer as soon as possible by creating an account on Metamask. The software will ask you to install an extension. Then you can create a new wallet. Pick the “Create A Wallet” option and proceed.
Set your password. Once you agree with the TOS, you can proceed with your account. A seed phrase will show up. It contains 12 random words that you need to copy and store in the safest place. These word sets are the only thing you have to retrieve your account in case you forget the password.
You will have two keys, public and private. Public keys are for tracking your transactions. Meanwhile, the private key works like your vault code.
There you have it. Now you are ready to get some Ethereum and transact.
If you want to know more about this, consider consulting with INC4 professionals.