Previously, we learned that cryptocurrencies are decentralized. In this case, is there decentralized financial services for them?
The answer is "yes".
What is DeFi
Decentralized Finance (DeFi) is a blockchain-based finance that does not rely on financial institutions (such as brokers, exchanges or banks) to provide financial instruments. Instead, it utilizes smart contracts (such as Ethereum) on the blockchain for financial events. DeFi allows people to lend or borrow money to others, trade cryptocurrencies, and receive interest in savings-like accounts.
What Is the Difference Between DeFi and Traditional Finance System?
The opposite of Decentralized Finance (DeFi) is Centralized Finance (CeFi), which refers to the most common financial institutions, such as funds, securities, banks, and insurance. Traditional financial institutions need to verify the clients’ information to determine the credit limit. They also act as the intermediaries for savings or loans services. As a result, the liquidity efficiency of funds is low, and the risk is relatively uncontrollable. On the other hand, DeFi uses blockchain to verify the user's on-chain identity. Anyone can use digital assets to participate in smart contract agreements to complete the borrowing & lending transaction without the need for intermediaries, thereby increasing the liquidity of funds and thus increasing the revenue of users.
How To Get Started With DeFi?
Compared to the traditional financial world, DeFi is funner. You can complete the events supported in the traditional financial world on the blockchain faster. No paperwork or third parties are required, just prepare your cryptocurrency with a crypto wallet. Let's introduce the four most common decentralized financial services in the DeFi field.
- Liquidity Mining
You can interact with the DeFi platform or provide liquidity (e.g., trading on the platform, staking, lending, borrowing) to receive cryptocurrencies issued by the platform as a reward.
- Automated Market Maker
Automated Market Maker (AMM) is a decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. You don't need to have a counterparty (another trader) on the other side to trade. Instead, you interact with a smart contract that "creates" a market for you.
You can stake and lock in your cryptocurrencies on the platform, during which you will not be able to access the assets. You will be rewarded with the corresponding cryptocurrency upon redemption at expiration.
- Borrowing & Lending
You can try the borrowing and lending services in the liquidity pool. Borrower and lender make transactions through the liquidity pool. The interest rate for each transaction is determined by the liquidity of the pool, i.e. the fluctuation ratio of the total amount of demand of the borrower to the total amount of cryptocurrencies of the lender. It allows the lenders to receive more interest and the borrowers to pay less interest.
DeFi's Current Ecosystem
Stablecoin is a fiat-collateralized stablecoins backed at a 1:1 ratio. Most stablecoins are pegged to and backed by the US dollar, such as USDT, USDC, etc.
- Transaction Layer
With the development of DeFi, the issue of the efficiency of the public chain has become increasingly prominent, especially for Ethereum. Therefore, many public chains are actively exploring solutions, which are divided into Layer 1 and Layer 2. Layer 1 raises the efficiency of the public chain, while Layer 2 is designed to improve the efficiency of Layer 1 (Ethereum Network).
- Crypto Wallet
The wallet, one of the most critical components of the DeFi ecosystem, is considered the browser of the DeFi world, through which we can use the various Dapp applications.
- Decentralized Trading Platform
Automated Market Maker (AMM) provides liquidity through an algorithm where buyers and sellers draw liquidity directly from the smart contract and receive quotes based on the number of tokens required and available liquidity. Therefore, it operates more like a "currency exchange" than an "exchange". The unique aspect of the AMM is that anyone can become a market maker by providing funds and earning profit from the trading fees paid by third parties.
- Decentralized Borrowing & Lending
Many DeFi platforms allow direct lending and borrowing of Ether via smart contracts, and one feature of these smart contracts is that the borrower does not need to find the lender and vice versa. Instead, smart contracts take over the role of the intermediary, and interest rates are calculated algorithmically based on supply and demand.
- Aggregation Protocol
In a DeFi ecosystem, there is usually more than one decentralized exchange (DEX). There are more than 20 trading platforms in the Ethereum ecosystem, meaning that the liquidity of assets will be scattered around. The function of the aggregation trading platform is to help users capture the best price on each platform and complete the purchase in one transaction, minimizing the problem of price slippage.
This is a brief introduction to DeFi. DeFi will bring more liquidity to the cryptocurrency market, and you can unlock early market insight by investing in DeFi on BingX. Visit the BingX app on [Buy/Sell - Spot - DeFi] or click https://bingx.com/en-us/market/spot/ to invest in the DeFi projects.