A Simple Introduction to DeFi

What is DeFi?

  • Also known as decentralized finance, blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains
  • In simple terms, rather than having a centralized entity like a bank that holds your cash and facilitates the transfer and receiving of cash; all of these functions are conducted in and by the blockchain
  • With DeFi, you do not need a bank to hold your cash, PayPal to transfer money, or a brokerage to trade stocks

DeFi Risks

  • Just because it has the functions of the bank or broker, it does not mean it’s as safe
  • Technology Risk: Smart contracts, or collections of code that carry out a set of instructions on the blockchain, are essential for DeFi applications to run. But if there is an issue with a developer’s code, then there could potentially be weaknesses within a DeFi protocol.
  • Asset Risk: To use the functions of the blockchain, you must convert into the crypto currency required by the block chain. The value of crypto is highly volatile and may increase or decrease significantly in value in a short period of time.

Most Popular DeFi Platform Today

  • Uniswap: Uniswap’s main distinction from other decentralized exchanges is the use of a pricing mechanism called the “Constant Product Market Maker Model.” Any token can be added to Uniswap by funding it with an equivalent value of ETH and the ERC20 token being traded.It has almost 0 fees for listing of coins, and users can control their funds securely and effortlessly.  
  • Chainlink: Chainlink is a decentralized oracle network that is poised to play an important role in the real-world implementation of blockchain technologies. The purpose of this network is to provide input on a variety of external sources of data.
  • Curve : a decentralized cryptocurrency exchange that helps users swap and trade Ethereum. Curve Finance also takes care to provide liquidity in the DeFi market.
  • DAI: Dai is a stablecoin cryptocurrency which aims to keep its value as close to one United States dollar as possible through an automated system of smart contracts on the Ethereum blockchain

To understand the different type of crypto platforms: 7 Types of Cryptocurrencies Explained

Could DeFi Replace Banks?

  • In theory, yes. Thinking about all the financial instruments banks offer today — currency, loans, insurance, bonds, credit cards, stocks, futures, options, interest bearing accounts. This all theoretically be replaced by the blockchain
  • Is it likely? Probably not anytime soon. Monetary policy is heavily reliant of having control on interest rates and money supply.
  • Governments will continue to regulate the DeFi space, while potentially exploring the idea of implementing a blockchain of their own

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Ricky Young

My belief is that financial freedom can only be achieved through a combination of smart investing and passive income. This is my journey to achieve financial freedom.

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