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What is DeFi?

DeFi is a name given to cover all aspects of Decentralized Finance. The advance of crypto currency and blockchain technology has opened the doorway for new ways of thinking about financial products and services we’ve grown accustomed to using. It’s now possible to bypass traditional centralized banking with a decentralized ecosystem that removes both the middle man and geographical boundaries. Borrowing, lending, asset exchange, derivatives and insurance are a few examples of transactions that can now be made peer to peer with no centralized control or authority. 

The DeFi Ecosystem

DeFi is made up of decentralized apps (Dapps) and tokens that all perform a specific function. Anyone can develop and launch a protocol that can be accessed by anyone in the world. Open source code can be copied, altered and redistributed as a new project. There’s endless possibilities for what can be created and how these protocols can be used in conjunction with each other to produce exciting ways to manage capital.

A base platform or blockchain is the foundation on which all of these protocols operate. Ethereum has been the leader in this space with more recent players like Binance Smart Chain also growing quickly. Interoperability will become important as Dapps become cross chain compatible and more platforms attract users.

Components of Defi

Two key features of DeFi are programmable money and composability. While Bitcoin has given us a medium of exchange, DeFi takes crypto further and allows for dynamic features to be baked into money while also allowing different protocols to work together as components of a larger financial ecosystem. Some of these components are:

Decentralized exchanges - DEX

  • peer to peer swap of crypto currencies without an intermediary.  

Stable Coins

  • Crypto currencies that are pegged 1:1 to the US Dollar or other fiat currencies. Stable coins are a necessary part of the ecosystem as they allow for users to interact without having to worry about the price volatility of Bitcoin and Ethereum.  

Wrapped BTC (WBTC)

  • Wrapped Bitcoin allows for BTC to be stored and used on the Ethereum Blockchain. Bitcoin is securely and transparently locked up and an ERC-20 token called WBTC is issued in its place. WBTC can be swapped back to BTC at any point in time. There are “wrapped” versions of other crypto assets as well.

Wallets

  • As with all crypto currencies, there are many different wallets you can use to hold your assets. 

Ways to take advantage of DeFi

  • Trade crypto on a Dex and cut out the need for centralized exchanges. 
  • Become a liquidity provider (LP) and lock up your coins for liquidity purposes and earn income from exchange fees. 
  • Borrowing and Lending - Borrow or lend on platforms that allow for individuals to borrow against their crypto holdings or lend out their portfolios and earn interest. 
  • Yield Farming - Implement complicated strategies utilizing DeFi tools to create higher yields. 

Is DeFi Risky? 

Yes. While there are things about DeFi that will ultimately be more secure than centralized finance, this technology is cutting edge and there are many unknowns. The space has not been around long enough to work all the bugs out. There’s already been issues with faulty code and scams that defraud participants. It’s best to approach all of this with caution and do not risk money you can’t afford to lose. Always do your own research and fully understand the platform or Dapp you are working with before risking any of your funds. 

Security

Your keys are always your coins. Probably one of the greatest attributes of DeFi, but with that comes great responsibility as you are in charge of your private keys. You are your own bank and security is on you. Make sure you have a security plan in place. 

One thing to look out for is the contract address. Make sure you verify that the protocol you are using has the correct address. This can be verified using Etherscan.io or https://bscscan.com/ for Binance Smart Chain.

All other crypto security measures apply with DeFi.

Conclusion

DeFi has already made quite an impact in crypto and has even fueled the recent alt coin bull run. While volatility is expected in a new market trying to figure itself out, DeFi has already shown itself to be a game changer in the way we think about traditional banking services. Alpha that was once only available to bankers can now be captured by anyone and intermediaries are no longer necessary. 

Resources

DEX
Uniswap
Pancake Swap

Stable Coins
DAI

Borrowing / Lending
Compound

Liquidity Pools
Balancer
Curve

Wrapped Tokens

Wrapped ETH
Wrapped BTC

Derivatives
Synthetix

Portfolio Trackers
Zerion

News and Research 
Dapp Radar