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What is DeFi?

What is DeFi?

Last updated 31st Jan 2023

The term DeFi stands for “decentralized finance” and the move to shift away from the more traditional centralized financial systems such as banks, brokerages or exchanges that facilitate transactions to a secure peer-to-peer service model without the need for transactional intermediaries.

DeFi platforms allow customers to lend or borrow funds from others, or to invest in a range of assets using derivatives, trade cryptocurrencies or to earn interest in savings-like accounts. The core belief behind De-Fi is centralized systems of control rely too heavily on human intervention which slows down or limits the volume, velocity and complexity of financial transactions.

By creating new distributed systems built on top of Ethereum, the world’s second-largest cryptocurrency platform, the role of transactional intermediaries is reduced or in some cases completely eliminated, saving time and money while accelerating business opportunities.

Decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individual investors, services developers, and institutions.

How will it revolutionize financial services?

There are several key benefits to DeFi that make this strategy appealing. First, DeFi services are accessible, meaning you don’t need any special software; all you need is an internet connection. This is particularly important for developing nations where financial systems are hard to access due to limited infrastructure.

What’s great is DeFi helps to democratize access to financial applications such as mobile trading. And because there is no centralized authority or control over DeFi accounts, owners of those accounts retain total control and oversight over their assets.

In addition, DeFi services are decentralized, so in many ways they are more immune to network hacks or governmental control. Meaning that it would be hard to shut down or disrupt DeFi services however, nothing is 100 per cent secure. De-Fi also facilitates greater transparency with an open finance model so that every transaction is publicly visible on the blockchain, verified by other users. And finally, it’s clear that De-Fi is changing the world of finance by enabling new models for asset ownership.

What are some of the potential drawbacks?

There are a few areas that are potential risks associated with DeFi.  For example because the majority of DeFi services are built on Ethereum’s smart contract system it would take just one hacker exploiting a smart contract to become the Achilles Heel for the ecosystem – assets locked in DeFi are only as safe as the rigor of their underlying protocols.  

In general, DeFi projects provide greater anonymity than traditional financial services and that’s a problem. A recent study by CipherTrace ( Association of Certified Crime Specialists) found 21 decentralized exchanges (DEX) or peer-to-peer marketplaces connecting cryptocurrency buyers and sellers had limited ID verification processes, or none at all.
Setting a low bar on identity verification enabled a hacker to steal $281 million in crypto from the KuCoin exchange that used Uniswap, the world’s largest decentralized exchange by volume, where the hacker has since sold off $7.9 million of stolen tokens while moving another $5 million in stolen crypto through various other DEXs.

How can investors get started?

There are 4 easy steps when starting to invest in De-Fi projects:

Buy Crypto from Fiat-To-Crypto Exchanges

The first step is to buy Bitcoin and Ether from a fiat-to-crypto exchange. This will be your point of entry transaction and will enable you to buy other types of cryptocurrencies.

Create a Crypto Wallet

Next you will need to create a crypto wallet which provides you an easy way to store your cryptocurrency which can be created in a matter of minutes. Once your wallet is set up you can then receive cryptocurrencies by transferring them from your crypto exchange account (i.e., Coinbase, Binance) to your wallet address.

Transfer fiat-to-crypto funds to your wallet

Make sure you are sending Bitcoin into a Bitcoin wallet address, Ethereum into an Ethereum Wallet address, XRP into an XRP Wallet address, and so on. If you send cryptocurrency into a different cryptocurrency’s wallet address, it will be lost forever.

Transfer funds from wallet to crypto bank

Crypto-banks connect you, as the depositor who wants to generate interest from your capital, to borrowers who pay you interest to use your capital to make purchases or investments. Most crypto-banks differ in terms of the interest and the range of cryptocurrencies they have available to generate interest, frequency that the interest is being paid out, and the user-friendliness of the platform.

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