Decentralized finance is one of the most revolutionary blockchain innovations in our world today. This is due to the technological shift that has occurred in the world of financial transactions as a result of eliminating the intermediary at the time of performing transactions and the possibility of completing transactions at any time of the day and anywhere in the world in an instant. So what is this new definition? And what should you know about it? Let's find out more.
In this article
What You Need to Know About DeFi in 2024
Lending and Borrowing on the Blockchain
Lending
Borrowing
The Liquid Storage Revolution in DeFi
Decentralized platforms
Decentralized Derivatives Market and the DeFi Revolution
Decentralized Finance Risks
What You Need to Know About DeFi in 2024
Decentralized Finance is an alternative to centralized finance or traditional financial transactions that are usually done through a bank. If you want to send money to a friend abroad or in a place far from you or want to borrow, most likely you will go to the bank to deal with it. But in some countries, the banking systems have collapsed, such as Lebanon, so it is impossible to deal with banks. In some other countries, banks have a very bad reputation and are a place for fraud and deception, and in other countries, such as Nigeria, it is difficult for the average citizen to enter a bank and deal with it.
All these reasons led to the development of a decentralized world on the blockchain that is suitable to replace the central banking system and give ordinary people the opportunity to conduct financial transactions away from banks. This new type of financing is divided into several sections that we will explain today:
Lending and borrowing
liquid storage
Decentralized platforms
Decentralized derivatives market
These are the main pillars of decentralized finance and they are based on the idea of smart contracts which we explained in a previous article. Let's learn more about them.
Lending and Borrowing on the Blockchain
The biggest challenge for ordinary people is always the inability to borrow from the bank at good interest rates like the rich. This makes a large segment of society marginalized from these banking services. Moreover, in third world countries in particular, most bank savings certificates are always in the interest of the bank at the expense of the depositor and lead to painful losses. For this reason, decentralized finance gives them the opportunity to practice lending and borrowing with the utmost ease and without the need to resort to the bank or deal with it in the first place.
Lending
If you have some money and want to lend it in dollars but your country’s banking system doesn’t allow it, you can easily lend it via blockchain. If you use an app like Aave or Compound, you can lend your dollars and earn a negative return in dollars. All you need is a hot wallet and gas fees.
This way you will get a return that is usually in line with the return announced by the US Federal Reserve. In bull market times, the return may be much higher due to increased activity on the network and traders seeking to pay more money to borrow, thus increasing your annual return. The return on the stablecoin USDT, which is the crypto version of the dollar, currently reaches 13% on the Aave app annually. This return may be very good for those who live in third world countries and do not want to invest in their local currency, which is constantly losing value against the dollar.
Borrowing
On the other hand, if you want to get a loan, you may not be able to get it in a poor country due to the high KYC requirements from banks. On the blockchain, you don’t need this. You can go to any decentralized lending platform and borrow from it against collateral. Let’s say, for example, you need to have a surgery that will cost $3,000 and you have a full Ethereum coin worth about $3,300. But you don’t want to sell your Ethereum because you expect it to rise in the coming period. You also expect to receive a bonus from your workplace worth $3,300 in two months, but the doctor told you that the surgery must be done now.
In this scenario, you will find the importance of decentralized finance, as you will be able to borrow from the Aave platform or similar platforms and you will get $3000 in exchange for staking your Ethereum with them. If the price of the currency falls below a certain limit, the deal will be liquidated and you will not need to return the loan, but if the price continues to rise, you can return the loan after two or three months and pay the interest on the loan. Note that you will only need to pay the borrowed amount plus the interest even if the price of Ethereum increases by 100%. In this way, you will carry out the transaction and pay the loan when you receive the bonus and you will not lose the Ethereum currency as well and you will be able to sell it at a high price if you want.
All this is not possible through traditional banks.
The Liquid Storage Revolution in DeFi
Since Ethereum switched from proof of work to staking, there has been a revolution in the world of staking. Led by a protocol known as Lido, liquid staking was designed. This design allows you to take full advantage of the world of decentralized finance. After moving to the staking system, it became possible to store Ethereum on the blockchain and get a return of about 4% per year. Through liquid staking, you will be able to store Ethereum and get this return, but you will get a coin known as STETH, which is an identical copy of Ethereum in value. You can sell this coin, you can lend it, and you can also trade it. However, in order to get your Ethereum back, you must return the STETH to the platform, so if you sell it, you will have to buy it back.
If you expect Ethereum to go down in the near future, you can store your Ethereum and earn 4% of it. When you receive STETH, you can sell it and buy it back at a lower price when Ethereum goes down, then get your Ethereum back plus the annual return. This process is only available on the blockchain, and you will not find similar processes available to individuals in the banking world.
Decentralized platforms
Most of the Arab world knows about centralized platforms, especially Binance, due to the widespread use of the P2P free market in the Arab world. However, not many people know that there are decentralized platforms available for decentralized finance, where you will not need to create an account and you can trade on them with confidentiality and privacy. You will only need gas fees and a hot wallet to complete transactions. One of the most famous of these platforms is the Uniswap platform, through which you can buy and sell various digital currencies with the utmost ease and through more than one network.
You don’t need to create an account or email and you can deal with all Ethereum networks. You can go to Jupiter if you want to deal with Solana network coins. All this makes investing available and possible for ordinary people. This is because trading on exchanges is not easy for everyone. Until now, the entry barrier to local exchanges is very difficult for many people in third world countries and is only available to a few rich people.
Decentralized Derivatives Market and the DeFi Revolution
The difference between spot and derivatives is that in spot you can buy and own the currency immediately. In derivatives, you bet on the price direction and speculate. This market is usually not available to the public because it allows for leverage. Therefore, in the traditional banking world, this tool is only available to the rich and powerful. Even when leverage became available on some centralized crypto platforms, some countries in Europe, for example, banned these platforms from dealing with their citizens. Therefore, these individuals had no choice but to turn to decentralized finance.
Some advanced decentralized platforms allow users to speculate via the decentralized platform and place buy and sell orders. This has become possible in the last few years after futures markets were exclusive to centralized platforms. Thus, this has revolutionized the world of speculation as it is now possible to speculate on cryptocurrencies only through a hot wallet and gas fees and nothing more.
Decentralized Finance Risks
There is no doubt that decentralized finance is one of the best inventions that have benefited humanity in general. However, there are risks to this decentralized world due to the lack of laws that govern it yet. Fraud and scams are very widespread on the blockchain because smart contract technology is still in its infancy and therefore vulnerable to fraud. Many hacks have occurred that have led to the theft of a lot of money on many networks. In addition, some platforms may impose very high and illogical fees due to the lack of alternatives. We must not forget the whales’ constant pursuit of controlling the markets and pumping and emptying currencies in order to make profits at the expense of the public. This means that this technology is not without flaws, but we expect that some of these problems will be solved in the coming period.
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