DeFi 101: A Beginner’s Guide to Decentralized Finance

Decentralized Finance (DeFi) has emerged as a captivating buzzword, sparking a profound shift in how we think about financial transactions. If you’re new to this, dive into this comprehensive guide to Decentralized Finance and get a clear grasp of what DeFi truly means.

Money has woven itself into the very fabric of human civilization since ancient times. Beyond serving as a practical tool for financial dealings, money stands as a significant emblem of trust between parties engaged in any transaction. The guarantee of a tangible entity in exchange for monetary transactions is a compelling rationale, making it nearly inconceivable to envision a world devoid of currency.

Cryptocurrencies have stormed onto the scene, hinting that our traditional notion of money might be on the verge of transformation. Amidst this, one question has taken center stage: “What is DeFi?” This acronym, which stands for Decentralized Finance, has been grabbing increasing attention. Notably, the surging demand for DeFi developers adds to the intrigue surrounding decentralized finance.

But, what exactly is decentralized finance, and how does it measure up against the traditional financial setup? In this introductory manual, we’ll walk you through all the essential information about this novel financial system, poised to potentially revolutionize the world of finance.

What’s Decentralized Finance (DeFi)?

Think of it as a special part of the cryptocurrency world that could shake things up. DeFi stands for decentralized finance, which means it’s a bunch of money tools on the internet that work without middlemen.

In the world of DeFi, you’ll find different money tools that don’t need anyone to take care of your crypto money for you. This is not like putting money in a bank or using a crypto loan service. With DeFi, you’re the boss of your money.

And when we say “decentralized,” it means that the people who made DeFi aren’t the bosses anymore. They gave that power to the users. DeFi works using smart contracts and apps that run on the Ethereum blockchain. These smart contracts do things like lending, trading, and more.

Imagine if you’ve ever had trouble getting a loan or the bank wouldn’t let you access your own money — DeFi aims to fix those kinds of problems and put more power in the hands of regular folks.

DeFi vs. Traditional Finance

To get a clear picture of DeFi, let’s look at how it stacks up against the traditional finance system (often called TradFi). Both DeFi and traditional finance help people handle money and do transactions, but they do things in quite distinct ways.

In traditional finance, companies or individuals control different types of assets and how things work. On the other hand, in decentralized finance, a bunch of smart rules, called protocols, control the assets.

DeFi Purpose: Decentralizing Financial Services

The purpose of DeFi (Decentralized Finance) address the need for an alternative to centralized financial systems. Traditional systems are centralized, and controlled by entities like governments and banks, leading to higher risks and single points of failure. DeFi emerged to provide transparency, inclusivity, and reduced reliance on centralized authorities. It offers solutions to doubts about centralized finance’s long-term potential, ensuring a more resilient and accessible financial landscape.

Understanding DeFi Protocols

To grasp the DeFi world, it’s important to get a handle on DeFi protocols. In simple terms, protocols are like rules or guidelines created to manage specific tasks. DeFi protocols are clever programs that come with rules to tackle some of the traditional finance system’s problems.

There are quite a few popular DeFi protocols you should know about:

AAVE: This protocol deals with lending in DeFi. People who support the protocol get AAVE tokens and have a say in its decisions.

Maker: A well-known lending protocol that helps create the DAI stablecoin. The protocol’s choices depend on the MKR token.

Uniswap: The top decentralized exchange (DEX) that uses its token, UNI, to encourage liquidity in certain pairs.

Oracles

To make smart contracts even better, they use oracles. Oracles are like messengers between smart contracts and the outside world. They bring external data to smart contracts so they can use real-world info. For example, they can get the current price of something. Oracles verify real-world data for smart contracts. A big name here is Chainlink, which is great at integrating outside data into smart contracts.

DeFi Use Cases: Explained

DeFi is a rapidly evolving world that could outshine what traditional finance offers.

Here are some key ways DeFi is used:

Decentralized Exchanges (DEX): These let people trade cryptocurrencies directly without using middlemen. Smart contracts handle transactions, ensuring security. Uniswap and DyDx are famous DEXs.

Decentralized Marketplaces: These platforms let you trade digital assets without middlemen. NFT (Non-Fungible Token) marketplaces, like OpenSea, are popular for unique digital items.

Lending and Borrowing: You can lend out your crypto to earn interest or borrow assets from others with interest. It’s a common DeFi use.

Endnote

DeFi offers a remarkable advantage by allowing you to take charge of your digital assets without relying on a central authority. However, it’s important to note that DeFi isn’t without its potential risks. Yet, there are ways to invest smartly in DeFi. A strategy could involve investing in tokens tied to promising projects, which can help mitigate risks.

To tap into the dynamic and swiftly growing DeFi sector, consider joining CosVM and exploring our dedicated DeFi section. Your journey into this innovative landscape awaits.