WHAT IS DeFi?
A FINANCIAL & TECHNOLOGICAL REVOLUTION
What is it?
For starters DeFi means “decentralized finance”, DeFi is a widely used term for any type of peer-to-peer financial applications, products and services that any individual with an internet connection can access. Because of many fundamental aspects that are needed to achieve decentralization, all of these services, products and apps are built on public blockchains, the main one being Ethereum but many other public blockchains which have superior speed, scalability solutions, lower fees and more security are rapidly gaining traction, e.g. Solana, Avalanche, Terra, Near, etc. DeFi also breaks the limits we have previously known, like being underage or unbanked and not having the capacity to participate in the financial world. Today with DeFi that has changed, now everyone can participate and take opportunities which could be life changing.
How did it start?
It all started with the first ever cryptocurrency, Bitcoin. Bitcoin was practically the very first DeFi application because its network allows you to really possess and control an asset, as well as to send it to anyone and anywhere all across the world without an intermediary or anyone’s permission. This means that no single entity has the authority to change the rules of its protocol, also it is important to mention that all of those rules are programmed in the code which makes bitcoin work.
The Big Boom of DeFi
It was not until Ethereum made digital money even more programmable using smart contracts, that DeFi became widely known and actually useable for the “average consumer”. The integration of smart contracts to blockchain allowed us for the first time to go beyond just storing and sending value, it opened a whole new paradigm of opportunities and use cases.
But things started getting really really wild in September of 2020 when the biggest DEX to date, Uniswap, launched their token UNI, which they also airdropped to many of its early users. That was a brilliant marketing idea since the people who got it, were spreading the word that they pretty much got gifted thousands of dollars since the price of UNI started to skyrocket after getting some attention. Uniswap was just the beginning, it paved the way to what we have today and what we will have tomorrow in terms of decentralized trading applications.
What can I do today with DeFi?
With DeFi, you can practically do the majority of the things that a traditional bank would offer and even more, for example with DeFi applications or services you can earn interest on your cryptocurrencies, borrow and lend your assets, buy different types of insurance, trade any digital asset, to even trade more complex financial products like derivatives and many more things that one would never imagine.
How can I use it?
Step 1: Download and setup your wallet
You will require a cryptocurrency wallet installed on your browser or on your mobile that supports the desired blockchain that you are going to explore and which can also connect to various DeFi protocols.
MetaMask is the most popular and reliable hot wallet, MetaMask supports a wide range of blockchains, from Ethereum, Binance Smart Chain, Polygon, to even Avalanche. For Solana my favorite wallet is Phantom. You can find tutorials on how to download and set them up in their websites:
Step 2: Buy the coins that you will need to use for fees
In DeFi you need to pay fees on every transaction or operation that you execute in order for it to go through the blockchain. For example let’s say you want to trade USDT for SHIB on Uniswap, which is built on Ethereum, you will need the USDT in order to buy SHIB but you will also need to have ETH in your wallet in order to pay the fees from the Ethereum blockchain.
You can easily acquire pretty most every big cryptocurrency in order to use DeFi on exchanges like Binance, KuCoin or Coinbase. Additionally you can buy crypto using digital fiat in a peer-to-peer platform and even in some cases with cash, just make sure that you are not getting scammed. In crypto we have this motto: “Don’t trust, verify.” and if you do not stick to it, you will probably end up learning an expensive lesson.
Step 3: Explore it
Just dive into the world of DeFi exploring through platforms like dappradar.com which is a portal to many decentralized applications. With time and effort you will pick up the pace.
Below is a table making a comparison between DeFi and traditional finance:
DeFi vs Traditional Finance
The key difference between the two is that DeFi in general terms is way faster (depending on the blockchain) and doesn’t require all the traditional procedures of an institution or a third party.
The following paragraph is quoted from: https://ethereum.org/en/defi/
“One of the best ways to see the potential of DeFi is to understand the problems that exist today.
- Some people aren’t granted access to set up a bank account or use financial services.
- Lack of access to financial services can prevent people from being employable.
- Financial services can block you from getting paid.
- A hidden charge of financial services is your personal data.
- Governments and centralized institutions can close down markets at will.
- Trading hours often limited to business hours of specific time zone.
- Money transfers can take days due to internal human processes.
- There’s a premium to financial services because intermediary institutions need their cut.”
All of those limitations become obsolete, non existent with DeFi.
Closing thoughts
Although DeFi is an astonishing and groundbreaking technology that gives us freedom of choice on how we use our money and which also makes us more sovereign as individuals, it has also its downsides. One of the biggest downsides is that DeFi by default is handled in a pseudonymous fashion, meaning that there are no identities just numbers and addresses, so the risk of getting scammed or hacked is way bigger than in traditional finance and if you get scammed there will be no authority who can bail you out since it is an unregulated ecosystem. Overall the future is VERY bright for DeFi and I’m surely very excited to be part of the next wave, are you? (Not financial advice).
