What is DeFi – popular Decentralized Applications
What is DeFi? How does DeFi work? What are the pros and cons of DeFi? What are the most popular DeFi applications? How to invest in DeFi?
The introduction of smart contracts into blockchains has caused a rapid growth of financial protocols and tools in the crypto space. The decentralization of smart contracts and blockchains has given rise to a financial ecosystem, which for short is called DeFi (decentralized finance). In this article, we will take a detailed look at what DeFi is and what their advantages are, what popular DeFi applications exist, and how to invest in DeFi.
Binance is the best cryptocurrency exchange with low fees and a large selection of coins.
What is DeFi?
DeFi, short for decentralized finance, is a global peer-to-peer system for storing and transferring assets without the structure, restrictions and costs of a traditional centralized banking system. DeFi can do everything that a bank can do, only faster and more transparently with the help of digital smart contracts in public blockchains, such as Ethereum.
How does DeFi work?
DeFi operates on the basis of a public decentralized network of blockchains, stablecoins and DeFi applications, also known as dApps.
Blockchains continuously collect blocks of data and link them, so past transactions are invariably documented. Each transaction is publicly verified by ordinary users, and once it gets into the chain, it cannot be changed. The decentralized nature of the blockchain makes it more secure compared to centralized authorities such as banks, corporations and governments. Blockchain technology allows you to track individual pieces of data, such as payments in cryptocurrency, so financial transactions can be verified and tracked to their owners, which makes them more secure than fiat currencies.
Stablecoins are a type of cryptocurrency, the purpose of which is a combination of transparency, securityand the efficiency of cryptocurrencies with the stability of fiat money. Read more about stablecoins here.
Most DeFi applications use the Ethereum blockchain to perform transactions. You can buy Ethereum and other cryptocurrencies to spend, borrow and store. Cryptocurrencies are what fuels the creation of a blockchain network. Using such decentralized applications as Maker, Compound and Bancor, you can do almost everything with cryptocurrency that you can do with traditional currencies such as the US dollar, including borrowing and lending. Among other things, you can invest in non-interchangeable tokens (NFT), which are gaining popularity among artists, collectors and celebrities.
Pros and cons of DeFi
Using DeFi provides several main advantages, including cost, speed and security. Anyone with an internet connection has access to blockchains and cryptocurrencies. Users can make transactions and move their assets at any time, without waiting for bank transfers or payment of bank commissions. DeFi works fast. The blockchain is updated immediately after the transaction is completed, and interest rates are updated several times in one minute. The open nature of DeFi means that all transactions are public.
You can also invest in the securities markets and conduct peer-to-peer activities. For example, DX. Exchange provides a platform for trading and investing in tokenized shares with the support of NASDAQ and MPS Marketplace Services Ltd. You can buy a house using cryptocurrency, provided that the seller agrees, and you will find a company that is ready to work with DeFi. New technologies, such as BitPay, can be used to purchase physical goods, which are usually paid in dollars by converting cryptocurrency into cash.
The economic impact of Covid-19 and the reaction of banksThis is another potential advantage of DeFi. In response to the downturn of the pandemic, some central banks have lowered interest rates to support consumer spending and protect the economy. However, this reduced the effective net value of bank deposits. In DeFi mode, the central bank will face a much more difficult task-to manipulate the value of its currency. In other words, DeFi allows users to protect the value of their assets from manipulation by the central bank.
There are also disadvantages that DeFi faces. DeFi users cannot protect the value of their assets from market fluctuations. The rates fluctuate often, and sometimes very much. The speed of Ethereum transactions also fluctuates, so trading can become expensive. In addition, decentralized applications are a relatively new technology, and it may still have disadvantages. There are also many potential tax implications associated with buying, trading and investing through DeFi.
See also what brokers exist with cryptocurrency trading.
Popular DeFi Apps
DeFi has provided many financial opportunities to everyone who has a cryptocurrency in their wallet. Here are some of the decentralized applications:
- Cryptocurrency Exchange (DEX). DEX allows you to trade and exchange cryptocurrencies without intermediaries. Popular dApps:
- Stablecoins. These are cryptocurrencies linked to other assets to stabilize the price. Popular tokens:
- Derivatives. These are contracts whose value is determined by market characteristics. Usually in traditional finance, contracts are executed by a third party called a broker, but with blockchain, third parties can only be smart contracts. Popular decentralized applications:
- Synthetic ($SNX).
- Lending platforms. Lending is carried out using smart contracts that replace banks or any intermediary. Popular dApps:
- Insurance. The main insurance dApps are used to protect the risks of smart contracts with other dApps. Popular Apps:
- Multichain Transfer. Transfer tokens from one blockchain to another, for example, send USDT to Ethereum through decentralized applications:
- NFT collections. NFT is a unique form of a token, pre -designated for special ownership, for example, works of art and game items intended for trading on the blockchain. Popular dApps:
How to invest in DeFi?
There are several ways to invest in DeFi. The simplest option, which provides only a general acquaintance with DeFi, is to buy Ethereum or another coin using DeFi technology. Buying a coin based on DeFi opens access to almost the entire DeFi industry.
You can deposit cryptocurrency directly through the DeFi credit platform to receive interest on your deposits. You can get higher interest rates if you want to invest for a longer period, and the interest rate paid on your deposit can be fixed or variable and vary depending on the market.
Since the demand for deposits among various DeFi platforms is high, a practice called "crop cultivation" has emerged. Farmers place funds on the platform that pays the highest interest rates, and they constantly monitor the current interest rates offered by other platforms. If another platform starts offering a better incentive, then farmers maximize their profits by transferring their deposits to another platform. Since the rates are constantly changing, farmers continue to transfer their funds from platform to platform.
If you want to participate in determining the future of the DeFi protocols themselves, you can buy a token, for example, UNI from Uniswap (CRYPTO: UNI). The UNI, known as the management token, gives you the right to make decisions about the future of the Uniswap protocol. As more and more people participate in the decision-making process by buying UNI coins, the future of the service becomes more and more interesting for more people, and to maintain significant decision-making powers, increasingly large UNI contributions are required. This dynamic can lead to a significant increase in the price of the token.
See also what brokers there are with Bitcoin trading.
DeFi's decentralized finance allows users to access funds and other assets at any time without any penalties or fees charged by banks and other traditional financial institutions. Widespread use of DeFi may accelerate the transition to a cashless society, although questions remain about future government regulation and security.
Read also the article " What is an IPO?".