A Decentralized Finance (DeFi) Guide to Absolute Elementary
1. You have billions of dollars at your fingertips.
If you're not into cryptocurrency these days, you've probably missed the news that there's something called Defy that has become Unicorn (a billion dollar company). This is a bit of a joke because DFI is not an organization or a startup, but a pool of somehow distinct and interconnected financial services built into the blockchain.
The term decentralized finance (DeFi) or open finance dates back to the end of 2018 when a movement of fifteen decentralized projects set a common goal of creating a more open financial system that does not require traditional banks.
2. So what is DeFi?
Long story short: DeFi finances cryptocurrencies for financing it brings decentralization and digitized confidence in finance.
Somewhat more complex: DeFi is a set of services, protocols, and technologies that provide a variety of ways to manage your cryptocurrency funds.
3. So what can you do with DeFi?
The same thing you do with your money and money but the difference is that you don’t have to use banks or financial institutions and you don’t have to provide any proof or sign any paperwork.
You don't even need an ID or additional proof. Everything can be done online with the help of your phone and computer. All of this evidence and belief is made by blockchain technology and you don’t need any middle-aged men to verify it.
4. Where is the catch?
No one. The smart people around us create technologies like programmable money, smart contracts and blockchain (and more).
The key to this technology is to provide a secure and reliable environment for managing and exchanging your crypto funds and financial activities.
5. Okay, well, can you give me more context?
Today we use traditional financial services, so we take money, invest it, or keep a pile of hard earned money in our safe place (usually bank).
Now when we have to take a loan, we go to the local bank, then we fill out some simple and demanding paperwork and if all goes well, we get the loan and then we have to be good people and make sure we have to repay it.
Same as our investment. When we want to invest we need to find a reputable company where our money is handed over to some smart and nice people with the expectation that they will take good care of it.
DeFi has the same purpose. This provides an opportunity to take care of our funds.Things are different from classic finance where in this case, we have complete control over your funds and investments, no one else has control over what you have and what you agree to. So no entity can take anything from you or interfere with your funds.
6. Why would I jump on this train?
If you:
Want to experiment a bit with exciting technology and appear smart in the bar.
There are some cryptocurrencies and you want to earn some interest without risk (theoretically).
Want to invest but don't have time to go with all the paperwork and institutional suppliers.
No access to banking or financial services.
Play with real investment schema (for advanced users).
7. What are my minimum funds?
It really depends on you. You can start with $1 or more, but it is wise to start with at least $10 to avoid all costs on gas (transaction costs) and exchanges.
8. Interesting.
It’s time for a more advanced interpretation. Remember, DFI is mostly built on blockchain in Ethereum.
A central part of the blockchain is the shared database (ledger) where all the data is stored. What data will be written in this book is taken care of by some algorithm (officially known as Consensus Algorithm).
The important part is that once something is written in the notebook, it cannot be changed without something new. So, if the Natus algorithm makes a deal that you have given 10 units to someone, it cannot be changed by anyone.
Moreover, all the data and transactions stored in the ledger are synchronized to thousands of computers. Thus the vacancy is distributed to all computers.
If one (or more) computer fails (or the government, service providers, or bad people take it down), the system still works. So, your 10 unit payments are distributed and not written on each single computer (node).
9. Let's get to the basics
Decentralization means that a central authority (bank, agency, government ...) has to take care of what is written in this bookNo need because digital comics take care of it.
This means we digitize beliefs, or put the belief system in the hands of technology. I know it sounds scary, but it comes with a lot of benefits. One of them is that we can automate many things.
Cryptocurrencies are digital money that is built on blockchain, so decentralized technology means that no central organization has control over them. So they can’t decide that you can spend your money in any way or block your actions.
Smart contracts are digital contracts that work the same way as paper contracts but they are programmed online and protected by advance encryption technology and distributed over blockchain, so are decentralized. These are triggered by certain actions and implemented in a decentralized manner, meaning that no central entity or bad actor can stop their supply. It brings a lot of benefits.
10. Hmm, wait, stop. Can we go back to DFI again when I am five years old?
You can easily imagine DeFi as a shared (financial) Lagos.
Imagine that red legos represent coins and tokens (hence crypto money), yellow legos represent some crypto services (banks) and then we have different colored lagos for all the different things we know from classic finance(Investment, liquidity providers, insurance and other more or less complex financial instruments)In classic financing every part of Lego is isolated, so you have to go to one supplier and fill out the paperwork (which is credit score, earnings) and then take them to another supplier for another service. With DeFi all this becomes unnecessary. All you need is a wallet (imagine a pocket wallet but for cryptocurrency) and crypto funds. From there you can do everything in a number of automated ways, because these legos are verified, trusted and shared with each other.
So once you have the funds in your wallet you can start putting Lagos together. For example, you can use these searches as collateral to receive new funds directly from other DeFi services and then you can lend these funds to some other person and you take interest margin. And as for the next Lego, you can instantly put interest rates on some DeFi services, says Forex Fund.
There are millions of combinations of how you put Lagos together and how you take care of your funds. And new services are popping up every day.
But even more exciting is how the new DeFi service is created.
Anyone in the DeFi world can issue or create their own legos. So you can create tokens or create protocols that enable certain financial options (such as futures). The beauty is that anyone can build these services on top of other services without any permission, because, smart contracts and data are shared and always available.
11. I am confused with these newly issued tokens and coins. How can they have value?
True. There have been lots of bad blood and scandals in this crypto world. And it would be an illusion to think that we are going over it. We will cover more in the next episodes.
12. And this shared data? How much money do I have in my wallet and how much money have I taken?
Yes, they can see how many wallets there are, or how much of the funds are locked into a smart deal. What they don't know is who owns that wallet. So if you don't advertise your wallet publicly, you're pretty anonymous.
13. Also, these smart deals are somewhat confusing.
True.
As we said, smart contracts enable you to sign digital contracts where you pledge some steps or funds into it. What you promise in this agreement cannot be revoked, because it is written in a blockchain and distributed to one thousand computers.
Smart contracts are applicable and cannot be revoked.
For example, if we agreed that I would pay Joanna 10 Etheriums (cryptocurrency) on May 1, 2020 and we signed it into a smart contract (I am locking my 10th in this contract), it would be implemented anyway and Joanna He will get his money.The other thing is that these smart deals are universally available, so everyone can use and reuse them.
Now Joanna can take this smart deal and use it for another smart deal, i.e. promised that 1st May will be my 10th and the next day I want to use this fund as collateral to take crypto loan in loan service. These will all be automated and will be as effective as written in the contract.
14. Okay, fair enough. Tell me plus?
It’s easy to get started and everything happens instantly. You don't need any paperwork or proof to get started. If you live in countries when it is very difficult to open a bank account, there are no barriers including DeFi.
It’s transparent, because smart contracts are open-source so you can check what the contract does (or someone else can).
It’s safe because you can’t (theoretically) spend or lose more than you can afford and you can’t gamble more than yourself. Whatever you do, you need to parallel it with something valuable (digital assets with value)
There are no credit checks and financial institutions do not have the power to cut your funds or do anything unwanted.
15. What about subtraction?
If something goes wrong, there is no central entity that will protect you, since no one controls the system. So you can’t run to your great financial manager and claim a refund or complain.
This is still an experimental technology. At the end of the day, you believe in everything in technology that can be buggy, fickle and unreliable. You need to know that if the smart contract is effective, there is no way back.
This is a highly experimental investment system. What if people start to panic? Will protocols will be stable, financial setups will be sustainable, entities (companies) behind certain services will keep their promises.
16. So what do I need to start?
Well, not too much. You need some cryptocurrency and a crypto wallet.
17. Where can I get the wallet?
We have more wallet types and we’ll talk about that in the next episodes.
Now the thing to remember is that you should always use open-source and non-custodial wallets. This means you keep your funds (private key with access to your funds in the account) under your ownership and control. It's like keeping your cash in your pocket, not in a bank or any other financial services account.
There are many wallets out there. A trusted wallet is a safe choice if you want to keep it on your mobile phone.
18. So what would be the first useful and easy case for me?
Swap!
If you have a cryptocurrency (say Ethereum) and you want to exchange it for something else (a stable currency called DIA), the most common way is through exchange. But doing so on exchanges is mostly expensive.
The swap allows you to give another token with one token with minimal expense and everything is done in your pocket (wallet).
So if you want to trade tokens with the lowest cost, this is a very effective way.
19. Can I take a risk?
Again, you play with your own money and there is no one who will give you back your lost funds. Don’t be greedy, don’t spend what you can’t afford and don’t do things you don’t understand.
Also, how provocative these issues are, is still experimental technology and experimental business models.
With....
Thank you friend for sharing this with you. It is good to know that many people don't know this