DeFi, or decentralized finance, is a financial ecosystem that operates on the basis of blockchain. The main idea of DeFi is to remove intermediaries like banks and give people complete control over their money. Let's break down the main concepts so you can understand how it works.
1. Blockchain
This is the foundation of DeFi. Blockchain is a large electronic ledger where all transactions are recorded. Each entry is transparent and immutable. It is thanks to blockchain that DeFi becomes so reliable.
2. Smart Contracts
These are programs that automatically execute the conditions of a transaction. For example, you want to borrow money through DeFi. The smart contract will automatically lend your money to another user and return it to you with interest if the conditions are met. This eliminates the human factor and reduces the risks of fraud.
3. Wallet
To use DeFi, you need a cryptocurrency wallet, such as MetaMask. It allows you to store your funds, sign transactions, and interact with DeFi applications.
4. Tokens
Tokens are digital assets used in DeFi. They can be:
- Utility tokens: used to pay fees or gain access to the platform.
- Stablecoins: pegged to real currency, for example, USDT to the dollar. They are convenient for maintaining stable value.
5. Decentralized Exchanges (DEX)
These are platforms for buying and selling cryptocurrencies without intermediaries. Examples: Uniswap, PancakeSwap. You exchange tokens directly with other users.
6. Liquidity and Liquidity Pools
Liquidity is the money that users add to the platform for trading. If you invest your funds in a liquidity pool, you earn a percentage of the fees.
7. Staking and Farming
- Staking: you 'freeze' your tokens on the platform and earn income.
- Farming: you provide liquidity and receive rewards in the form of new tokens.
8. Risks in DeFi
- Hacking smart contracts: if there is an error in the code, hackers can exploit it.
- Sharp price fluctuations: cryptocurrencies are very volatile, which can lead to losses.
- Fraud: choose only verified platforms.
DeFi is a powerful tool that provides access to financial services without intermediaries. However, before you start, it is important to learn the basic concepts and understand the risks. Start with small amounts and choose reliable platforms to get accustomed to this new world.