What Is DeFi?
DeFi is an abbreviation for “decentralized finance,” a collective term for blockchain-based applications that disrupt the legacy financial system. It eliminates the control and monopoly of central banks and other financial institutions imposing on people’s finances by championing peer-to-peer (P2P) settlements.
Summary of Important Points
- DeFi leverages blockchain technology to eliminate third parties from financial settlements.
- It champions financial inclusion by giving access to anyone with an internet connection and a digital wallet.
- It brings power back to the people by allowing them to hold their financial assets in digital wallets.
The Key Features of DeFi
- Permissionless DeFi leverages an open, permissionless access system instead of the standard access model common in the legacy financial system. People from all walks of life can access DeFi products and services through the internet.
- Programmability Smart contracts are programmed into DeFi applications, facilitating the automatic execution of established terms and conditions. This streamlines financial settlements and opens up new wealth generation avenues.
- Transparency All DeFi transactions are available and accessible for other network users to verify. This advanced transaction transparency increases the security and trust of DeFi users.
- Immutability The sharing of transactional data in DeFi applications calls for data integrity. For this reason, it is essential to have an incorruptible data coordination system on P2P networks.
- Interoperability The compassable software stack of most public blockchains allows DeFi products and services to integrate and complement each other easily. Developers can build new solutions and incorporate functionalities into existing contracts. Besides, they can customize interfaces and integrate more applications.
- Non-custodial Lastly, DeFi users enjoy total control of their finances and data. Decentralized wallets like Metamask helps users to utilize permissionless apps and protocols.
How Does DeFi Work?
As mentioned earlier, DeFi products and services are built on blockchain technology (the technology behind digital currencies). DeFi applications process transactions automatically and in a permissionless way.
In a blockchain network, every transaction is recorded in a block format and then confirmed by network users or miners. When the miners verify a transaction, the block is secured and encrypted before mining the next block.
The verified blocks are “chained” together using the data in every scheduled block; thus, the name "blockchain." It is essential to point out that information in the chained blocks can’t be altered without affecting the subsequent blocks, making blockchain data immutable.
The Common DeFi Use Cases
The above features make DeFi ideal for numerous applications, such as:
- Decentralized exchanges (DEXs) Online marketplaces enable users to trade various cryptocurrencies. DEXs are crypto marketplaces that allow peer-to-peer trading without the help of an intermediary.
- Stablecoins These are digital currencies pegged to tangible and intangible assets like commodities or fiat money in order to stabilize their price. They are the solution to the needs of crypto users looking for a cryptocurrency equivalent to fiat money, like the US dollar.
- Lending platforms Decentralized applications that leverage smart contracts to offer financial lending and borrowing services online.
- Prediction markets These are markets for predicting upcoming events, like sports. DeFi prediction markets aim to provide the same function as traditional prediction markets without third parties.
Centralized vs. Decentralized Finance
In centralized finance, client money is controlled by financial institutions, like banks, whose main objective is generating profits. This monetary system utilizes intermediaries who process and approve transactions between parties and then impose transaction charges on its services. For instance, assume you use your credit card to buy pizza from your favorite restaurant. After the restaurant cashier initiates the deduction, it is sent to your bank and forwarded to the corresponding credit card company.
On the other hand, decentralized finance eliminates third parties by enabling users to carry out transactions via blockchain technology. This is achieved via P2P applications that employ security protocols. Users can trade, borrow, lend, and stake digital cryptocurrencies from any part of the world. DeFi apps give users more power over their assets via decentralized wallets and exchanges by eliminating third parties.
Posts and articles about Defi
What is TradFi and DeFi?
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What are the best node projects to invest in for passive income?
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How do liquidity pool fees work?
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How does impermanent loss work with a stablecoin?
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Which DeFi lending platforms are recommended?
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What are DeFi lending protocols?
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What does DeFi mean in crypto?
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Which is the more profitable strategy: yield farming or staking?
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Can anyone make an NFT?
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Are stablecoins worthwhile investing in the long term?
I want a long term investment that I can watch grow. Are stable coins worthwhile as a long term investment? Thanks in advance!
Are there DeFi platforms that allow instant access to staked coins?
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Is it a good idea to invest in DeFi staking?
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Do L2 protocols pose less risk for generating higher returns for yield farmers?
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How can I convert tokens to coins in a DeFi money market?
I want to be able to convert tokens to coins in a DeFi money market. How do I make this happen?
What are the most popular tokenization platforms?
I am very keen to learn more about tokenization in the context of decentralized finance. What are the most popular tokenization platforms for me to check out?
What is the interest rate on margin trading?
My father and I are launching ourselves right into the world of DeFi and margin trading. What is the interest rate on margin trading?
What is forced liquidation in margin trading?
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What is the difference between node and masternode projects?
I don't understand the difference between node and masternode projects. Please can someone help me understand?
What are the parameters required to create FaaS pools?
I want to create a FaaS pool of my own. What are the parameters required to create FaaS pools?
What does it cost to create FaaS pools?
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What are the steps to create a FaaS pool?
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How much time do I need to create FaaS pools?
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Do deflationary tokens increase in value?
My business partner and I are looking at the possibilities of deflationary tokens. Do they increase in value over time?
What are the advantages of deflationary crypto assets?
Deflationary crypto assets is the new buzzword around my business. What are the advantages of deflationary crypto assets?
Are there any risks in staking deflationary tokens?
I want to stake my deflationary tokens. Are there any risks involved in this?
What are the benefits of holding onto deflationary coins for yield pool value?
I want to know if I should hold onto my deflationary coins for yield pool value. Are there any benefits to doing this?
How do deflationary tokens work?
I have a very limited understanding of deflationary tokens. How do they work?
What platforms can I buy stable coins from?
I want to get into the world of stable coins and investing! What is the best platform where I can buy stable coins?
Can you make money from stable coins?
I need to know that my investments will convert to money that I can actually use. Can you make money from stable coins?
Can I get high yields from stable coins?
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Will I earn a high interest rate on stable coins?
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What are the costs involved in running node projects?
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What can a DeFi loan be used for?
Hi all. Could someone please help me understand what a DeFi loan can be used for? Thanks!
What risks come with DeFi lending?
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How do DeFi loans work?
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What is DeFi lending?
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What is the most popular DeFi lending platform?
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Are there apps for DeFi lending?
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What are the major lending risks in DeFi?
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What are the security risks of DeFi lending platforms?
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How do DeFi lending protocols work?
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What assets can be tokenized?
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How does DeFi lending compare with traditional lending?
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What is collateral in DeFi lending?
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Are there any risks to the DeFi borrower?
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Are there threats to banks in DeFi lending?
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Do all DeFi lending protocols leave out centralized intermediaries?
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How does lending work on Aave?
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How do you increase scalability in blockchain?
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Why is scalability important in blockchain?
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Is stablecoin yield farming a good investment?
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How is stablecoin different from other cryptocurrencies?
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Where can I yield farm stablecoins?
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Which platform is best for yield farming stablecoins?
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How do I convert Bitcoin to Ethereum on a DEX?
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Where can I see my transactions on a blockchain?
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How does the Sifu scandal affect Wonderland in Crypto?
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Are NFTs Cryptocurrency?
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How was your trading experience with TradFi vs. DeFi?
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Is yield farming stablecoins safe?
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What is the difference between bear and bull markets?
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Help! My fUSTD just disappeared.
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What is cross-chain in DeFi?
Hello. What does cross-chain mean in decentralized finance? Thank you
Why did the Ethereum community split into Ethereum and Ethereum Classic?
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How did the Ethereum Yellow Paper differ from the White Paper?
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What's the difference between TradFi and DeFi?
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Is DeFi better than than TradFi?
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Is TradFi or DeFi the future of crypto?
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What advantages does DeFi have over TradFi?
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What are some popular use cases of DeFi?
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What did Buterin write about in the original Ethereum White Paper?
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DeFi vs crypto: What's the difference?
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What are stablecoins in cryptocurrency?
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What do off-chain transactions mean in cryptocurrency?
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Which cryptocurrency has the least amount of volatility?
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What are smart contracts?
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Cryptocurrencies with the smartest contracts?
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Is DeFi safe?
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How important is interoperability in DeFi?
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Can NFT's be used in DeFi?
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Will NFT's last forever?
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Why should I use DeFi over other cryptocurrencies?
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How can I build a DeFi lending protocol?
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Do you think DeFi will replace TradFi?
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Which are the best yielding strategies on Polygon?
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Can someone share advice on bear strategies?
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Do yield farming bots exist and are they safe?
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Are there any DOA toolkits that can assist in rapid decentralized decision-making?
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Is Nexo a great platform to earn a passive income on?
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How sustainable are NaaS projects?
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What is multichain bridging?
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How do futures provided by centralized exchanges influence the price of the underlying assets?
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What's the difference between DeFi 2.0 vs 1.0?
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How many DeFi protocols are there?
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Is decentralized insurance the next big DeFi trend?
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How do we work with crypto volatility in DeFi?
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Will I still be liable for the network fee on a congested DeFi network?
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Is Ethereum still worth investing in?
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Where do I see my P2P transactions history with DeFI?
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How is DeFi currency different from other cryptocurrencies?
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How do I compare DeFi/CeFi's yield rates?
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Why are smart contract transactions irreversible?
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How can I use reduce volatility in cryptocurrency?
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Are stablecoins better than bitcoin?
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Which cryptocurrencies use smart contracts?
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Is DeFi completely anonymous?
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Can you get insurance for defi?
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Can I stop crypto exchange hackers?
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What is LP in decentralized finance?
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What is meant by hedging?
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What is a blockchain?
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What does it mean to tokenize an asset in blockchain?
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