DeFi explains: What is Decentralised Finance? 2021 Guide
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The aim is to build up a fully-fledged guide to this highly interesting crypto area, from which you as a reader should derive plenty of information.
What is DeFi or Decentralised Finance?
DeFi is the abbreviation for Decentralised Finance and means decentralised finance. More precisely, it is a kind of digitalisation of services in the financial sector.
The term has become particularly widespread in the crypto sector, as such services are increasingly being used on the Ethereum blockchain.
In this respect, DeFi can be seen as an attempt to transfer the traditional market of international finance to the 21st century and to find technological solutions for it. At this point, one or two people may see themselves oriented towards start-ups and fintechs, which are following a similar path.
Up to now, the technology has mainly been newly set up in the classic internet, but the blockchain is supposed to be able to offer more security and more reliable software.
How does DeFi work exactly? The Ethereum Blockchain and Smart Contracts explained.
The blockchain is the basis of decentralised finance. More precisely, various applications and providers have spread on the Ethereum Blockchain by means of smart contracts. Such smart contracts allow for a fully automated query and confirmation of online purchases.
Of course, the whole thing can be excellently transferred to services and thus enables an efficient and fast online solution for various areas of application.
More information on potential applications in the DeFi area will be explained later on this page. Smart contracts can also be found via the so-called D'Apps, for which the Ethereum blockchain was created.
This is a big area of differentiation from Bitcoin, for example, which is less about actual applications. DeFi has actually given Ethereum a real push, so that Ether is well on its way back to its old heights. After all, the cryptocurrency is and remains the big driving force of the entire network.
The more providers are represented here and can sell their services, the more Ethereum itself is worth.
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Traditional finance vs. fintechs vs. DeFi
Differentiating between the different areas can make sense. Traditional finance is often based on banks that offer services and contracts in branches in the traditional sense. This is where loans are approved, credit cards issued or even the path to share trading is made possible.
The problem with this time-honoured banking solution is time and cost. Compared to modern applications, an employee in a bank branch can hardly keep up with the cheap and fast solutions that fintechs or DeFi make up.
Fintechs, on the other hand, are corporations and start-ups that have customised solutions for modern applications in their repertoire. On the one hand, these can be providers such as eToro, which specialises in trading, but on the other hand, the cryptocurrency company Ripple is also often referred to as a fintech.
After all, this is a fast and inexpensive way to exchange currencies. Fintech is thus an abbreviation for companies that use technology to simplify and sell financial services.
DeFi can be as the next step in the development of such Fintech companies. However, the issue of decentralisation and automation is now playing a bigger role. Thus, the blockchain should take over the most important tasks fully automatically and at the lowest possible price.
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Applications in the DeFi area
1. lending
Lending is nothing other than the classic granting of credit. In the future, it should be possible to obtain a loan much more quickly and easily via the blockchain.
So far, there are the first providers who even disburse cryptocurrencies in seconds.
The technology takes on the role of credit agent and checks collateral and the solvency of the contractual partners.
2 Borrowing
Borrowing can be translated as "lending". This is not so much a profitable form of money lending, but rather a service provided free of charge.
Of course, the blockchain can also find answers here via DeFi and keep payers and recipients informed about the current state of affairs at all times.
3. decentralised exchanges
In the vast majority of cases, cryptocurrencies see themselves as decentralised, i.e. not based on a single location. The blockchain is the home of such applications and companies. In the past, numerous exchanges and exchanges have thus already gathered on the chain to offer their services.
So far, this has already been proven to work. However, it should also be noted that regulations play an essential role in the financial sector, which such exchanges cannot provide in most cases.
4 Trading
The same applies to the area of derivatives and trading. For this, too, there are now numerous applications and apps in the DeFi sector. The corresponding software gives users access to various asset types.
Cryptocurrencies can be traded, but in some cases also fictitious goods such as trading cards or digital works of art.
5 Payment
One of the most practical areas of application is in payment. Payments will become increasingly digital in the future. Many a market observer has already predicted the end of cash. So it is only logical that DeFi also deals with such digital forms of payment.
However, users should not notice any major differences in the application compared to conventional providers.
Fast and cheap is the motto.
6 Yield Farming
Yield farming is a way to earn a fixed interest rate through DeFi. In this way, you use fixed strategies to collect a return. This can be done, for example, by investing cryptocurrencies or making them available for loans.
The English term yield thus ensures regular payments and income.
7 Liquidity mining
Liquidity mining is closely related to yield farming. Basically, mining is a way to generate new cryptocurrency tokens. In the case of certain coins in the DeFi sector, those miners are rewarded who provide the network with the necessary liquidity, i.e. park their coins.
This is where the term liquidity mining comes from.
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The most important DeFi Apps
Oasis App (MAKER DAO).
The decentralised app from Oasis enables trading, lending and interest returns via the cryptocurrency DAI. However, the app also supports other cryptocurrencies such as Ethereum, BAT or Tether.
The protocol of Oasis is confirmed by means of smart contracts and ensures security in the decentralised network.
Compound
Compound is an interest protocol that is also at home on the decentralised Ethereum blockchain. The DeFi phenomenon has been able to increase its prices dramatically and is now also available on crypto exchanges such as Coinbase.
Automated interest rates are to be made available to developers via an algorithm, which in turn should create opportunities for new financial apps.
Uniswap
Uniswap is also a protocol for an automated form of liquid Ether. This is thus intended to ensure that the blockchain itself can be supplied with sufficient tokens at all times. Users can exchange tokens via the app or contribute their share to the liquidity and thus collect interest.
Yean.Finance
Yearn.finance is also one of the DeFi tokens. This finance app is supposed to be the best way to profit from the interest in the DeFi network. Thus, the app simply filters the existing offers from other D'Apps to determine the best price.
The cryptocurrencies are then automatically deposited there. The application is thus a comparison and working aid in one.
Investing in DeFi: how can you participate in Decentralised Finance?
In fact, there are many different ways to participate in the DeFi phenomenon. On the one hand, you can simply invest in Ethereum and buy Ether via PayPal, for example.
On the other hand, Ethereum mining is also an option to acquire the tokens that are so important for the functioning of the entire blockchain. Thus, one does not invest in DeFi directly, but rather in the infrastructure of the technology.
Another option is to invest in DeFi tokens themselves. This fundamentally increases risk to a certain extent, as these are often small unknown projects with an as yet uncertain outcome, but it also increases potential returns. This could be observed particularly well with Compound in 2020.
Last but not least, you can simply use the smart apps themselves and, for example, provide liquidity and thus collect interest. However, it should also be noted that the interest is usually paid out in the respective cryptocurrency itself.
So if the general price of a coin falls, even the best interest rates are of no use if the price drop is too high. Ideally, both the interest rate and the price will rise.
Conclusion
DeFi conclusion: what could the future look like?
DeFi is still in its infancy. Little by little, more and more apps are coming onto the market that want to outstrip the big banks, so to speak. In fact, it remains to be seen whether the DeFi movement will be accepted by the masses in the long run. Crypto is and remains a highly speculative investment field.
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FAQ
DeFi is the abbreviation for Decentralised Finances. This refers to offers and services on the blockchain that provide various financial services via applications and platforms.
It is indisputable that a lot of hype has broken out around the DeFi sector. However, there may be individual applications that definitely bring added value for the user and are thus justifiably highly valued.
The easiest way is to invest in DeFi Coins such as Maker or Compound via a licensed platform. We recommend the test winner eToro.
Of course, knowledge in the crypto area is important for a possible investment. However, you don't have to be a computer virtuoso, as long as you believe in the future of technology, you will also find a way to get into the Defi cryptos.
To date, there are no far-reaching global licences in the crypto sector and thus also not for DeFi. However, this may change in the near future, which could turn the entire market upside down. An investment is and remains a risky venture.
