Decentralized finance.
WHAT IS DEFI?
Well, it stands for DECENTRALIZED FINANCE.
We have always employed centralized finance in the past, which is when a central authority, such as the government or banks, controls the movement of money. They don't say they do. But they do. They can print more of it if they want to, restrict you from borrowing it if you don't want to, and even prevent you from having a bank account if they don't want you to. They could have your money if they wanted to; they already have it, therefore they could change it. And you can't argue with that. I mean, you could but how would you prove it, you gave your money to them, it was based on trust.
Another point to consider is that traditional finance is highly costly, with payday loans costing up to 500 percent of the loan amount. Credit cards can average 25%. Personal loans, too, can cost you up to 18% of your home's worth. These are exorbitant prices, but you have no choice but to pay them if you need to.
Decentralized finance, in which no banks exist, is a viable option. Instead, there are code modules that run and serve as a bank. They're open to anyone. Because they're a piece of code running software, they don't require you to trust them, you could read through it and verify that it's not going to scam you. They are also censorship-resistant. Finally, they are significantly less expensive than traditional centralized finance. Cryptography, blockchain technology, and smart contracts are the three fundamental components of decentralized finance.
I’ll be explaining the above terms in my next articles for those who don’t have the proper understanding of the topic.
ELEMENTS OF DECENTRALIZED FINANCE (DEFI)
Assuming you understand cryptography, the blockchain, and how smart contracts work, let's dive into the five elements/areas of decentralized finance.
1. Decentralized Exchanges
Decentralized exchanges (DEXs) allow consumers to purchase and trade cryptocurrencies without the use of brokers.
Traditional exchanges (centralized exchanges) provide currency exchange services, but the investments available are subject to the will and costs of the exchange. One of the disadvantages of centralized exchanges is the additional cost of each transaction, which is addressed with Decentralized Exchanges.
Exchanges such as uniswap and pancake swap provide the platform for users to swap from one currency to another using smart contracts.
A smart contract is a piece of programming code that allows applications to self-execute agreements, ensuring that the trader gets the coin or cryptocurrency he or she desires.
2. Stablecoin
Stablecoins are cryptocurrencies whose value is tied to another cryptocurrency, fiat currency, or exchange-traded commodities.
They can be linked to a currency, such as the US dollar, or to the price of a commodity, such as gold.
Stablecoins were beneficial in the crypto ecosystem during risk-off periods, providing a safe refuge for investors and traders. They are a reliable collateral asset because of their stability. Stablecoins' value does not change as much as other cryptocurrencies like bitcoin or ether, and they can be made stable using computer techniques as well.
Coins like Tether, Dai, Usdc are examples of stable coins.
3. DeFi Lending and borrowing
Users can lend money to other users without involving third parties. The usage of smart contracts ensures that a user adheres to the loan's terms. These contracts exist on the blockchain.
Consider a Trader who has a variety of cryptocurrencies but does not trade or exchange them. A smart contract allows that trader to lend those assets to another party at a predetermined interest rate.
Users who want to borrow money will have to provide a guarantee, but in the DeFi environment, the guarantee will be in the form of cryptocurrencies worth more than the loan itself.
I know u might be wondering, why collect a loan when you have the capital already, to understand this, let’s take this example A user may require funds to cover unexpected bills, but they do not intend to sell their assets because they believe the assets will appreciate in value in the future, let’s say I have 500$ worth of Ether and I don’t want to sell it but I need funds for something, I can use my 500$ worth of Ether as collateral hoping the price would increase as at the period I am collecting the loan, let’s say a loan of USD 450, so that eventually when I payback, the value of my Ether may be worth $750, so I pay the loan of $450 and still get back the same amount of Ether I placed now worth 750$ back.
Also, users can dodge or postpone paying capital gains taxes on their cryptocurrencies by borrowing money through DeFi protocols. Individuals can also boost their leverage on specific trading positions by borrowing from DeFi protocols.
Comp and Aave are platforms with DeFi lending and borrowing protocols.
4. Margin trading
DeFi crypto margin trading is the process of trading a financial asset using borrowed funds from a broker, which serves as collateral for the trader's loan. Typically, a DeFi broker is one of the decentralized money marketplaces.
By doing this you are increasing your chances of making more profits from a successful trade, so d opposite happens when your trade is going sideways. It entails trading with borrowed funds to improve your market exposure beyond what you might achieve with your own money.
It is considered highly risky and complicated.
To engage in margin trading, you must often make an initial deposit to create a position known as initial margin. This initial deposit is normally retained as collateral by the platform. You may be required to have a particular amount of capital in your account to keep your position open.
4. Margin trading
DeFi crypto margin trading is the process of trading a financial asset using borrowed funds from a broker, which serves as collateral for the trader's loan. Typically, a DeFi broker is one of the decentralized money marketplaces.
By doing this you are increasing your chances of making more profits from a successful trade, so d opposite happens when your trade is going sideways. It entails trading with borrowed funds to improve your market exposure beyond what you might achieve with your own money.
It is considered highly risky and complicated.
To engage in margin trading, you must often make an initial deposit to create a position known as initial margin. This initial deposit is normally retained as collateral by the platform. You may be required to have a particular amount of capital in your account to keep your position open.
In some exchanges, because fees are applied to the entire amount traded rather than just the initial margin, your position may be liquidated if you are unable to cover transaction expenses.
DeFi platforms for margin trading are :
In some