Economics Design

Sustainable Digital Economies

You are here: Home / Featured Insights / DeFi / DeFi Explained: A Beginner’s Guide to Understanding and Getting Started

DeFi Explained: A Beginner’s Guide to Understanding and Getting Started

posted on by

Introduction

What we’ve been noticing

A new wave of revolutionary open financial systems is disrupting the industry and changing the way we do business. Decentralised Finance (DeFi) is an emerging financial technology that can fundamentally change our existing financial system. DeFi is not just the latest trend, but a fundamental shift in how we access and transact with digital assets. The DeFi economy has grown massively in the past few years. Even with the recent crash in the crypto market, DeFi is staying around 80 billion dollar level as of 26 June 2022. DeFi is the next step in digital finance. It’s a new financial product that allows you to bet on anything, from derivatives contracts and coin offerings to cryptocurrency markets. In the era of blockchain technology, a whole novel financial world is emerging. DeFi is the future.

Key Topics this Article will Cover:

  • The Future of Finance: What is DeFi?

  • How is DeFi changing the way we do business?

  • Why DeFi is taking over: It’s importance and benefits

  • Conclusion: Our verdict. Is it worth getting involved?

The Future of Finance: What is DeFi?

DeFi is a financial system that runs on a decentralised network of computers rather than a single server. DeFi is an emerging digital financial infrastructure that theoretically eliminates the need for a commercial bank or government agency to approve financial transactions. With DeFi you can do the things that banks allow you to do, such as borrow, lend, earn interest, buy insurance and trade assets in a faster, cheaper and more secure way that doesn’t require any paperwork or bank fees. There are billions of individuals all around the world who cannot access many of the financial services that we enjoy today. DeFi makes these financial services available to anyone with an internet connection from any location.

Regarded by many as an umbrella term for a new wave of financial services innovation, DeFi is deeply connected to blockchain. This is the decentralised, immutable, public ledger on which cryptocurrencies such as Bitcoin are based. The ledger records cryptocurrency transactions and is owned by everyone on the network, making it an incorruptible system for building trust and eliminating fraud. The idea is that no single entity has control over, or can alter, that ledger of transactions.

How is DeFi changing the way we do business?

DeFi uses blockchain technology, the same technology that cryptocurrencies use, to provide financial services, eliminating the need for intermediaries such as central entities like banks, governments, and exchanges. Such services include lending (where users can lend out their cryptocurrency and earn interest), receiving a loan instantly, making peer-to-peer trades without any middleman, saving cryptocurrency and earning a better interest rate than from a bank. 

Peer-to-peer (P2P) financial transactions are one of the core premises behind DeFi. A P2P DeFi transaction is where two parties agree to transact cryptocurrency for goods or services without a third party involved.

Why DeFi is taking over: It’s importance and benefits

DeFi is a cutting-edge financial technology that streamlines the way individuals and companies hold money. DeFi reduces the fees and restrictions that intermediaries such as traditional banks and other financial institutions impose on their customers for using their services. Without these intermediaries policing, processing, and charging fees at every turn, financial transactions become faster, more affordable, more transparent, and perhaps most of all more accessible. 

DeFi creates financial markets that are accessible to anyone with an internet connection. It uses cryptocurrencies and smart contracts to provide financial services without the involvement of banks. With the addition of more dApps, the possibilities of what you can do with DeFi continue to grow.

The most popular uses of DeFi include:

  • Sending money anywhere in the world in an efficient and affordable manner.

  • Storing money using crypto wallets.

  • Borrowing and lending on a pool-to-peer level.

  • Trade cryptocurrencies anonymously and at any time 24/7.

  • Trade non-fungible tokens (NFTs).

  • Crowdfunding, which is an effective way to raise capital for startup projects.

There’s more than one way that people are attempting to capitalise on the growth of DeFi. One strategy is generating passive income using Ethereum-based lending apps. Essentially users loan out their money and generate interest from the loans. Another strategy is yield farming, a riskier strategy for more advanced traders. In this practice, users scan through a large number of DeFi tokens in the hopes of finding opportunities for larger returns. Bear in mind, though, that DeFi also possesses risks inherent in cryptocurrencies, including the prospect of intense regulatory scrutiny, extreme price volatility and the technology itself.

Conclusion: Our verdict. Is it worth getting involved?

DeFi allows people to make transactions directly with other people using blockchain networks, rather than through centralised institutions like banks. This cuts out the middleman and makes financial transactions quicker, cheaper and more efficient. Its market is booming as more enthusiasts, app developers and opportunistic cryptocurrency investors are drawn to it. DeFi is very risky, the regulatory environment still shapes. DeFi protocols are the largest targets for hacks, and crypto is a highly volatile asset class. It’s even riskier for those who are just starting out in the space, lured by the potential gains of yield farming and passive income.

Watch the video below to learn more about DeFi. Don’t forget to like and subscribe so you don’t miss out on important updates and our newly uploaded videos.