What is Decentralized Finance (DeFi) – A Complete Beginner’s Guide

Decentralized Finance (DeFi) services are offered on a blockchain. And the good part is that anyone across the world can access them. This article dives deeper into the DeFi sector. Get to learn the various services offered and how this sector differs from traditional finance.

Difference Between Decentralized Finance and Fintech

Many confuse Fintech with DeFi since they both do not rely on banks to offer financial services and operate on the Internet. However, they differ in a way: While DeFi protocols are built on decentralized blockchains, Fintech companies, on the other hand, rely on centralized Web2 technology to create platforms for offering access to financial services.

DeFi Use Cases

Lending and Borrowing

Blockchain technology has made it possible for anyone to access loans or even lend their funds in exchange for interest, all that without banks’ involvement. There are several protocols offering lending and borrowing services, with most of them living on the Ethereum blockchain. They include:

Compound

This is one of the oldest lending and borrowing protocols. It allows users to borrow and lend a wide range of crypto assets like DAI, BAT, USDC, ETH, ZRX, and REP. If you lend, you will receive interest in the form of cBAT, the native token of Compound. Unlike its rivals, Compound offers flexible interest rates, which change depending on the market conditions.

Dharma

Dharma has a functionality that most lending platforms lack. The protocol lets users withdraw their funds directly to their bank accounts. To take out a loan from Dharma, you are required to deposit DAI, USDC, or ETH as collateral. Note that the interest rate to be paid varies from coin to coin.

Maker

Maker is known for its stablecoin DAI. But did you know that the platform also offers borrowing and lending services? To secure a loan, you must deposit ETH as collateral. Maker usually issues loans in DAI only.

Decentralized Finance Asset Management

Crypto investors can now manage their entire portfolios under one roof, thanks to asset management apps. Some of these apps are:

Melon

Melon is a perfect crypto management tool for investors who are holding ERC-20 tokens and ETH. Unfortunately, it does not support other assets.

InstaDApp

This app lets you monitor your investments in various Ethereum-based protocols from a single interface.

Decentralized Exchanges

Centralized exchanges offer the most convenient way to buy cryptocurrencies. However, users must provide personal details to purchase any digital currency. People who like privacy may be uncomfortable with this. In that case, they can use decentralized exchanges, which let users transact anonymously. Some of the top decentralized exchanges include

PancakeSwap – It runs on the BNB Smart Chain. With this decentralized exchange, you can swap tokens from multiple blockchains such as Aptos, Ethreum, and Base.

UniSwap – It is an Ethereum-based decentralized exchange allowing DeFi users to exchange ERC-20 tokens.

Venture Capital

Over the years, it has been difficult for startups to access financing from traditional finance players. But DeFi is looking to change that. Today, there are investment DAOs (Decentralized Autonomous Organizations) comprising investors who let startups access funding without too many restrictions.

Gitcoin is among the most popular investment DAOs available. It lets anyone with a business idea pitch it to investors, who later select the project to receive funding.

Risks in Decentralized Finance

Smart Contract Risks

There have been rising cases of hacks in recent months, especially in the DeFi space. This is due to smart contracts being open-sourced, thus allowing anyone to access them. In case a bad actor identifies a vulnerability, they can use it to drain funds from a DeFi protocol, leading to losses.

Moreover, transactions in the DeFi sector are irreversible. Therefore, if you enter the wrong crypto address, your funds are lost forever.

Fraud Risks

As an unregulated sector, DeFi has been an ideal avenue for scammers. So always be vigilant. Do not deposit funds into any protocol without doing your thorough homework.