Understanding DeFi
DeFi is one of the hottest topics in the crypto space. And if you ask me it’s earned its place, it’s one of the most exciting developments coming to the finance sector.
If you don’t have any idea on what DeFi is, continue reading
What is DeFi? It means decentralized finance.
DeFi is a concept that covers what traditional financial systems do (lending,borrowing, investment, saving and insurance) with the aid of a smart contract.
A smart contract is a program that is stored and runs on a Blockchain platform. It removes the middleman between a buyer and a seller so you can implement things like automatic payments, and investment products without the need for a centralized authority.
What’s the advantage DeFi has over traditional finance?
- It requires no permission, anyone with access to a crypto wallet and internet connection can access it.
- Higher returns on investment due to volatile prices.
- DeFi protocols work 24/7. They don’t have working hours like the traditional financial systems.
- It’s a transparent network. All records of transactions are on the Blockchain.
- Human error and mismanagement is avoided thanks to smart contracts.
Most DeFi applications are built on Ethereum. It’s because ethereum is a decentralized Blockchain that has the ability to execute smart contracts.
What can you do with DeFi?
- Send and receive money: With Decentralized applications in place.It’s easier and faster to send money to anyone in the world at any time. You just need the recipient’s wallet address to make the transaction.
- Examples : MetaMask, Rainbow wallet
2. Yield Farming: This is another way to earn money in DeFi. It involves you lending your tokens through a Blockchain contract(also known as a smart contract). In return, you get rewards in the form of interest. It’s similar to saving money in your bank account and interest is being generated every month.
- Examples: AAVE, Compound
3. Crowdfunding projects: Crowdfunding is a way to raise money for projects, startups and business expansion. Using DeFi will enable trust and credibility as it’s built on blockchain technology. There’s also no centralized influence on how much a project can get. You can raise money by issuing tokens and minting NFTs for sale.
4. Trading Financial assets: you are able to exchange and trade tokens,assets directly with a trader on a decentralized exchange instead of buying from a traditional exchange like (the Australian stock exchange). Here prices are based on supply and demand.
- Examples: Index Coop.
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