Demystifying Decentralised Finance Part-1 : Getting Started

DeFi in today’s world is a pain for not only non-blockchain developers but also for blockchain developers. Let us try to find out reasons why-

1. DeFi is a vast topic and people find it quite difficult to get started as there is not a proper roadmap?
2. Understanding Finance terms is bit tricky and adding a flavour of Decentralisation makes it more difficult?

There can be more reasons or may not be, all this reasons are just an assumption that I’m trying to make, but let me tell you DeFi is not that hard and through this article or maybe a series of articles in near future we will try to demystify that……lot of talks LET’S GET STARRRRTEDDDD!!!!!

What is DeFi?

DeFi is an acronym for Decentralised Finance. If you are versed with centralised finance then on a high level decentralised finance is just bringing those things on a smart contract, so all those fancy terms that you hear about finance i.e. borrowing, lending, interest, loans, savings, trading etc. are now possible on blockchain.

Can it be called Open Finance???? Yessss, why not!! It is open finance because it creates an open system, where everything can be verified on the blockchain.

So in conclusion, in DeFi you can use your crypto assets to lend, borrow, send, earn, spend, trade and more, and it has many advantages over the traditional financial system that we will discuss further but before that I know what you must be thinking……….Is it.. that why do we need DeFi???? I know I guessed it correctly so let’s dive into that question and find some possible answers.

Why DeFi?

So for this we will look at an real life scenario:

There is a decentralised exchange platform called Uniswap which was asked by US government to ban some countries, not going deep into why…and Uniswap actually put those restrictions and the users from those countries were not able to see the website…but here is the catch!!!

As I told before De of DeFi comes from the word Decentralised and Uniswap has its smart contracts on Ethereum which can be accessed from anywhere and any part of the world without any restrictions, because Uniswap is just a frontend of the Uniswap protocol existing on Ethereum blockchain so even if they banned frontend, the backend part was still available for usage, and several UI’s popped up after the ban that had same interface as Uniswap and were working fine for the people residing in the banned countries.

Imagine this example in the traditional or centralised finance exchanges, people residing in the banned countries would never be able to use the platform and this real scenario actually showcased the true power of Decentralised Finance.

Sectors in DeFi

There are mainly 6 sectors in DeFi which can be further categorised in sub sectors-

Stablecoins

This is the base layer of DeFi ecosystem. Stablecoins are generally the cryptocurrencies which are designed such that they have a stable value and is often pegged to US Dollars. For example- USDT, USDC etc.

There are sub-categories of Stablecoins —

1. Fiat collateralised stablecoins- USDT(Tether), USDC(Circle), USDP(PAX)
2. Crypto asset backed stablecoin- DAI
3. Algorithmic Stablecoins- AMPL, FRAX
4. Synthetic assets- wBTC

Transaction Layer

As the DeFi space is growing, there are many performance issues of ethereum or other Layer-1 blockchains that are becoming more prominent, so many blockchains are actively seeking Layer-2 for the performance improvements and seeking other solutions so as to carry DeFi operations efficiently.

1. Layer 1- Ethereum, Solana
2. Layer 2- Polygon, zk-Rollups

Oracles

Oracles are the bridging point for the on chain and off chain world. They provide the information such as real time price of USD to all kinds of dapps or protocols.

1. Oracle- Chainlink

DeFi Foundation Projects

We read above about stablecoins, transaction layers, oracles. These form the infrastructure on which DeFi is built and with the help of them many DeFi focused decentralised applications can be built.

There are certain sub categories in which the DeFi projects are divided-

1. DEX- Curve, Uniswap
2. Lending & Borrowing- Compound, Aave
3. Derivatives- dYdX, MCDEX

Aggregators

Aggregators are those who serve as intermediaries in the DeFi space, DEX Aggregator Platforms provide various decentralised financial services and provide users with a unified interface to access these services.

The primary goal of a DeFi aggregator is to simplify the complex DeFi ecosystem and enhance user experience.

Popular aggregators categories are-

1. Yield aggregators- Yearn Finance
2. DEX aggregators- 1inch, Paraswap

Wallets

Wallets serves as one of the most important components of the DeFi ecosystem and are considered the backbone for DeFi investors to use various dapps.

Popular wallets that you might have heard of-

1. Metamask
2. Trust Wallet

EXXTRAS: Do you know that we can also insure our smart contracts? Yes, we can. We have platforms like Nexus Mutual and Opyn. Do get a look on those platforms!!

This is all for this article, keeping it short and simple. I hope you must have got the base covered that was required for to get started with DeFi, in upcoming articles we will try to focus more on the platforms which we discussed and try to dig deep into writing our own DeFi contracts.

NOTE: If you want to read more about DeFi, I have provided you the link to Mastering DeFi pdf in the resources section of this article. Do give it a read as I have provided a summary of all the categories which the pdf covers in detail. However we will also cover all the categories in depth in the upcoming articles.

If you enjoyed reading this article, please do leave a clap or a comment and you can also connect with me on LinkedIn and Twitter. You can follow me on Medium as I keep writing about some of the new and less known things about Blockchain.

Resources

1. Uniswap Website Scenario
2. Mastering DeFi