Everything you Need to Know About DeFi

Looking to yield farm and gain interest on your stablecoins? Tired of dealing with sleazy bankers? or maybe you’re just in it for the tech? look no further. In this article, I will be detailing the basics of DeFi.

DeFi 101

DeFi stands for decentralized finance. This technology is based on traditional blockchain architecture which is used to bypass the traditional banking system. The aim is to create an alternative system for payments, loans etc.

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Why is DeFi Important?

DeFi is important as there is no middleman. The gatekeeper is removed and therefore the trust is placed in the smart contract. Here are some of the top benefits:

  • Open and permissionless – anyone can access this technology. You aren’t excluded based on your income or credit history. There is no application process or some arduous bureaucratic procedure to abide by. There is just a safe (mostly) and open software to interact with.
  • Profits are passed onto the consumer – the days of 0.1% interest rates are coming to an end. Now with popular protocols such as Aave you can get up to 2.7% on your stablecoins.
  • Self custody – funds can be stored on a self-hosted wallet such as a ledger. The user has complete control over their capital and they are out of reach of authoritative parties.

DeFi Risks

Hacks. You cannot talk about DeFi without talking about the countless number of hacks. From the infamous Ronin bridge hack to the Poly Network hack, upwards of $1.2 billion was lost. But it doesn’t stop there. Here are some more risks associated with DeFi:

  • Self-Custody – you may be asking, but didn’t you already list this as a pro? Yes I did. However, with self-custody comes the huge responsibility for your funds. Unlike traditional finance if you get scammed or lose your money, tough luck (for the most part). Yes, we have decentralized insurance platforms like nexus mutual but they are not nearly as fleshed out as the existing infrastructure in conventional finance.
  • Smart contract failure – the sad truth is DeFi is a new and underdeveloped market. Many of the protocols have not been stress tested at a large scale.

Top DeFi Protocols

Data can be found at Defilamma.com

The top 3 DeFi platforms by total value locked (TVL):

  1. Maker – Maker is a platform that allows users to use their assets as collateral to redeem Dai. This is the decentralized stablecoin of the maker ecosystem which is pegged to the dollar.
  2. Lido – is a smart contract platform that allows users to gain interest on their Ethereum without locking them up via staking.
  3. Aave – is a decentralized protocol where users can borrow and lend. Smart contracts facilitate peer-to-peer interactions. Aave has a total value of over $6 billion in TVL across 7 networks.

Closing Remarks

As you can see decentralized finance is an extremely ambitious sector that provides many opportunities. It has real utility and does not discriminate. If it continues to grow, evolve, and deal with the security flaws this industry will flourish. If you want to learn about the Dark Side of DeFi you can read my previous article.