Understanding DeFi: The Basics

One of the revolutionary promises of cryptocurrencies is to provide global access to payments and financial services, irrespective of location. DeFi enthusiasts advocate for it as a superior alternative to the current financial system.

But what exactly is decentralized finance? How does it compare to traditional finance? In this beginner’s guide, we’ll explore the essentials of DeFi, a financial system that has the potential to transform the world.

What is Decentralized Finance (DeFi)?

DeFi, short for decentralized finance, represents a segment within the cryptocurrency space that has the potential to be highly disruptive. DeFi encompasses a wide range of financial tools and services that operate freely on the internet without centralized control.

The DeFi ecosystem includes numerous non-custodial products, meaning users retain control over their assets without relying on a managing team, unlike depositing money in a bank or using a crypto loans company. In DeFi, you always have control over your assets.

Moreover, decentralization means that the creators of DeFi protocols relinquish control to users through a voting process, ensuring that no single entity holds power over the network. Essentially, DeFi consists of smart contracts and decentralized applications (DApps) operating on the Ethereum blockchain, offering financial services like loans, exchanges, trading, and more.

If you’ve ever faced the tedious process of applying for a loan or had a bank restrict access to your funds, you know the traditional financial system isn’t always user-friendly. DeFi aims to change this by creating a user-focused financial system with minimal corruption or mismanagement. In DeFi, all users have equal rights and control over their funds and transactions.

DeFi vs. Traditional Finance

To understand DeFi better, let’s compare it to the traditional finance system (TradFi). While both systems aim to help people manage money and make transactions, their operations differ significantly.

In centralized finance, assets and processes are managed by institutions or individuals. In contrast, DeFi relies on smart protocols to manage assets.

Here are key differences between DeFi and traditional finance:

Management

DeFi applications operate without institutional management. Rules are embedded in code, known as smart contracts, which run on the blockchain and execute automatically when conditions are met. These contracts require minimal human intervention, unlike traditional finance, which depends heavily on human interaction.

Transparent Coding

Blockchain code is transparent and open to public audit, fostering a higher level of trust among users. Transactions are also public, though pseudonymous, unlike the opaque processes in traditional banking.

Accessibility

Traditional financial products’ accessibility varies by institution and often involves high fees for international transactions. DeFi is designed to be globally accessible, offering the same services to anyone with an internet connection, subject to local regulations.

Permissionless

DeFi apps are permissionless, meaning anyone can create or use them. This contrasts with traditional finance, which has numerous gatekeepers and account sign-up requirements.

User Experience

In traditional finance, if you dislike your bank’s app interface, your options are limited. In DeFi, you can switch to a different interface or even build your own.

What are DeFi Protocols?

DeFi protocols are autonomous programs with rules designed to address traditional finance’s shortcomings. Some popular DeFi protocols include:

• AAVE: A lending protocol offering the AAVE token for those participating in governance.
• Maker: A lending protocol behind the DAI stablecoin, with MKR as its governance token.
• Uniswap: A leading decentralized exchange (DEX) with the UNI token.

Other notable protocols include Curve, SushiSwap, PancakeSwap, Compound, Instadapp, Kyber Network, and Balancer.

TheStandard.io: A Unique Player in the DeFi Ecosystem

TheStandard.io is an innovative DeFi protocol native to the Arbitrum network, designed with a focus on borrower flexibility. Here’s how it integrates into the broader DeFi ecosystem:

• Collateral Management: The protocol allows users to lock multiple types of collateral into a single, abstracted vault. This multi-collateral approach enhances flexibility and security for borrowers.
• Collateral Trading: Using Arbitrum’s Uniswap, users can trade between different collateral types, providing dynamic portfolio management within the DeFi space.
• Zero Interest Loans: One of its standout features is offering 0% interest loans with true 110% collateral, eliminating the risk of random third-party redemptions.
• Liquidation Pools: These ensure there is always more collateral locked up than the stablecoins in circulation, maintaining system stability and security.
• Revenue Distribution: Income generated from collateral trading fees, debt minting fees, and other sources is distributed to staking pools, incentivizing participation and investment.
• Multi-Stablecoin Output: Initially launching with EUROs, TheStandard.io plans to expand to USDs soon, broadening its appeal and utility.
• Dynamic NFTs: Representing the CDP smart vault, these NFTs allow users to sell their debt and locked collateral in a single transaction, adding liquidity and flexibility to the market.
• Ease of Use: The protocol provides a straightforward and cost-effective way to borrow against a portfolio of assets without surrendering private keys, and it aims to offer sustainable yield opportunities soon.
• Yield Bearing Collateral: Upcoming V4 vaults will have the option for the user to earn a significant yield on their collateral, while holding their private keys and borrow at 0% interest.

Key Elements of the DeFi Ecosystem

Layer 1

Layer 1 solutions are the foundational parts of the DeFi network, essential for the ecosystem’s integrity and scalability. Examples include Ethereum, Bitcoin, and Binance Smart Chain.

Oracles

Oracles provide external data to smart contracts, allowing them to access real-time information from outside the blockchain. Chainlink is a prominent oracle provider.

DeFi Use Cases

Decentralized Exchanges (DEX)

DEXs are peer-to-peer marketplaces for crypto trading without intermediaries, such as Uniswap and DyDx.

Decentralized Marketplaces

Platforms like OpenSea and Rarible allow global trading of digital assets, including NFTs, without middlemen.

Aggregators

Aggregators like 1inch bring together trades from multiple exchanges, enhancing efficiency and saving time.

Lending and Borrowing

Open lending platforms enable users to lend digital assets for interest or borrow assets, paying interest.

Yield Farming and Liquidity Providers

Yield farming involves locking digital assets for rewards, often via smart contracts, offering high-risk/high-reward opportunities.

Stablecoins and Synthetics

Stablecoins are pegged to assets like fiat currencies to reduce volatility. Synthetic assets mimic other assets, offering new trading opportunities.

Conclusion

DeFi allows you to manage digital assets without centralized institutions, presenting great opportunity. Thorough research and caution are essential when engaging with DeFi platforms. To dive deeper into this exciting, rapidly evolving world and to see how we’re building the ultimate DeFi protocol, join TheStandard’s Discord community or explore our app. Discover the innovative features and benefits that make TheStandard.io a standout in the DeFi ecosystem.