What is Defi?
Defi stands for Decentralized financing. It is a term that includes various financial applications in cryptocurrency. In addition, this is not controlled by a single centralized body. Above all, it is not governed by a central body like RBI. There are specific reasons for decentralization. As nobody has control over it, no one can limit its speed. Moreover, it provides direct control of their money.
The major advantage of Defi is it removes all the middle sources. Therefore, users have direct access to their funds. They will be able to do direct purchases, take loans, do insurance, crowdfunding, and many more. Basically, the idea is open finance.
Most of the applications, that is Defi are on the Ethereum platform. It is the world’s second-largest cryptocurrency platform after Bitcoin. This platform is for smart contracts. The execution of transactions is automatic. Above all, it also gives more flexibility. Some types of Defi applications are :
- Decentralized exchanges (DEXs) — These platforms help users to exchange their cryptocurrency. It gets exchanged for other currencies. DEXs are a type of exchange where users trade their cryptocurrency. This happens without the involvement of any intermediary party.
- Stablecoins — The value of cryptocurrency varies a lot. In addition, it is very volatile in nature. So, Stablecoins are a cryptocurrency that got ties to an asset. This brings stability to the cryptocurrency.
- Lending platforms — This platform connects the borrower with the lender. They use smart contracts. So, this removes the option of middlemen or intermediaries.
- Prediction markets — This platform is for betting purposes. It is a market where people bet for the future outcome of something. Also, the aim of this platform is to provide the same functionality. The major advantage is the absence of middlemen.
Some new Defi concepts have also come up. The list includes:
- Yield Farming — This is basically for the users who are willing to take the risk. The users can scan among the various Defi tokens available. Among them all, he will check for opportunities that will yield more returns.
- Liquidity mining — This is the most popular form of yield farming. In this, the user earns free tokens by providing liquidity to the token.
- Composability — The Defi applications are in the public forum. So, anyone can view the code behind these
- applications. Hence, these apps get used to creating new apps with the same code. The same code gets used as building blocks here.
- Money Legos — Legos are the toy blocks. By combing the toy blocks, a child creates a building or a structure with the legos. This works in the same way. Defi apps get combined together to build new financial applications.
Making money with Defi and risks involved
The Ethereum Defi projects are on the boom recently. Many users are making a lot of money from it. User can lend money and gain interest through this. Users can use yield farming methods to gain larger returns. But investing in Defi is risky as well. There is no governing body present. The systems are very complex. They don’t provide transparency. So, a lot of knowledge and exposure is the basic requirement for this.