RB.ru - With the gradual mass adoption of Web3, it is becoming increasingly clear that the future of payments and finance lies in decentralization. But what is DeFi and how are they different from traditional centralized finance? We answer popular questions.
Every reader of this article uses banks in one way or another: transfers, deposits, loans. There are several bottlenecks in a seemingly reliable banking system that greatly reduce the level of trust in it and negatively affect the safety of funds. The institution processing the money transfer can block it at its discretion, suddenly increase the fee, or close down altogether. If you're worried about these risks, it's time to dive into DeFi.
Content:
What is Decentralized Finance (DeFi)?
Popular DeFi
DeFi market size
Applications of DeFi
Advantages and disadvantages
Who benefits from decentralization?
How to invest in DeFi?
What is Decentralized Finance (DeFi)?
Decentralized finance (DeFi) is an ecosystem of applications and services that run on the blockchain without the intermediaries of banks and exchanges. Unlike traditional financial instruments, which are usually controlled by centralized organizations, DeFi is based on Web3 principles, so decision-making is distributed among network participants.
Popular DeFi
Contrary to popular belief, not all crypto projects are decentralized by definition. The largest exchanges and wallets like Binance, Coinbase and Crypto.com, like banks, monitor user transactions and block accounts if necessary. What then can be called real DeFi?
Uniswap is a decentralized exchange (DEX) that allows users to trade tokens directly among themselves through smart contracts on the Ethereum blockchain.
Aave is a lending protocol that allows users to earn interest on their deposits or borrow in cryptocurrency.
Yearn.Finance is a platform that automates the process of finding and investing in the most profitable DeFi solutions.
Curve Finance is a platform that provides liquidity for trading stablecoins and other Ethereum-based digital assets with minimal losses.
Avalanche is a blockchain platform specifically designed for creating and running decentralized applications (DApps).
DeFi market size
Despite the crypto winter and the decline in interest in Web3 among the mass user, the DeFi market has grown significantly over the past 5 years. According to analytics service DefiLlama, the total value of all assets in DeFi currently exceeds $98 billion with a daily trading volume of $8 billion.
Number of investment rounds by category / Cryptorank.io
In addition, DeFi projects consistently remain in the top in terms of the number of investments received among all sectors of the crypto industry. As noted in the Cryptorank.io report, only Web3 startups and infrastructure solutions can compete with them.
Applications of DeFi
DeFi tools can exist in different forms. In particular, decentralized exchanges (DEX), credit protocols, insurance and investment crypto platforms, as well as smart contracts (programmable contracts on the blockchain that automatically execute under certain conditions) fall into this category.
In terms of real-world applications, due to its high level of security and transaction processing speed, DeFi solutions are often used to make cross-border payments. In this case, traditional analogues (SWIFT and SEPA) are significantly inferior to the blockchain in many respects.
DeFi is also popular among investors who are interested in less risky ways to invest. Staking, liquidity mining, and equity participation in various funds often operate on the basis of decentralized protocols.
Advantages and disadvantages
Centralized and decentralized finance are distinguished by the availability of tools to a wide range of users and speed. In order to start investing through DeFi platforms, you just need to create a crypto wallet—DEX does not ask you to obtain the status of a qualified investor or spend large sums to open an account. Moreover, all transactions in a decentralized system take place instantly and without the participation of intermediaries.
Moreover, following the precepts of the Web3 economy, all information about transactions and operations in DeFi is available on the blockchain. This provides a high degree of transparency and leaves less room for maneuver for fraudsters and unscrupulous users.
However, decentralized finance also has its downsides. In particular, like any other technology, DeFi is subject to the risk of cyber attacks, which in theory could lead to the loss of funds. For example, in the first half of 2023 alone, the Upbit crypto exchange experienced 159 thousand hacker attacks - fortunately for users, none of them were successful.
It is worth noting that many DeFi services are not suitable for the mass user. Technically, all you need to do to start using a DEX is connect a wallet, but in reality, potential investors also need to understand a complex interface and a number of terms.
Who benefits from decentralization?
Decentralization gives users greater control over their data and assets, as well as complete freedom from censorship and restrictions. DeFi eliminates the possibility of discrimination and allows for seamless participation in the next generation economy. For business, decentralization means reducing the risk of interference from regulators and government.
How to invest in DeFi?
Before investing in DeFi, you need to decide on the investment format. In the world of decentralized finance, users have access to staking, farming, purchasing index tokens, fractional ownership, and many other tools.
After this, the potential investor needs to register a crypto wallet. To remain in a decentralized environment, you should choose an appropriate wallet. For example, MetaMask, Ledger or Trust Wallet.
By connecting your crypto wallet to the selected platform (Uniswap, Yearn.Finance, SushiSwap or any other), the user will have access to the DeFi tools mentioned above. All he has to do is purchase cryptocurrency on the P2P market and start using it.
Not an investment recommendation.
