We will tell you what DeFi is, how it works, whether there is a future for this technology, and how to make money on DeFi.
1. What is DeFi
DeFi is financial instruments in the form of services and programs created on the blockchain. The main task of decentralized finance is to become an alternative to the banking sector and replace the traditional technologies of the current financial system with open source protocols. That is, to open a large number of people access to decentralized lending and new investment platforms, as well as allow them to receive income from cryptocurrency assets.
Popular service types are decentralized exchanges, lending protocols (loans and deposits), farming protocols, and DAOs.
The advantage of DeFi is that no registration or provision of personal data is required. For interaction, crypto wallets are needed – software interfaces for managing assets stored in the blockchain. With a non-custodial wallet, the user has full control over their funds through private keys. In the case of custodial wallets, the private keys are managed by the service provider.
And where are the assets stored and all transactions take place? Another important block of the ecosystem is smart contracts. It is a blockchain-based program code that executes, controls and documents relevant events and actions in accordance with certain conditions and rules.
Based on smart contracts, decentralized programs (Dapps) are created, often integrated with the user interface using traditional web technologies, and decentralized autonomous organizations (DAOs): organizations whose rules are defined and regulated using smart contracts.
2. Benefits of DeFi
The market has long known the advantages of decentralized financial services:
– Lack of human factor. Decentralized finance (DeFi) works on the basis of smart contracts, which makes the human factor impossible.
– You can also mention the transparency – the DeFi market is based on the source code. All transaction information is always available to any user. Therefore, such programs will simply pass an honest audit.
– Another significant advantage of the ecosystem, experts call inclusiveness, that is, the ability to launch a DeFi product for any project, without the permission of banks and regulators.
– You can use financial services without intermediaries. Loans are issued in a few clicks at home, without bureaucratic delays and draconian interest.
3. Disadvantages of DeFi
– Experts attribute low system performance to them. Blockchains are inherently slower than their centralized counterparts, resulting in the creation of additional applications. Developers of DeFi applications should consider such limitations and optimize their products accordingly.
– There is a high risk of user error within the system. DeFi applications transfer responsibility from intermediaries to the user. This can be a negative aspect for many. Designing products that minimize the risk of user error is especially challenging when products are deployed on top of immutable blockchain networks.
– Another factor of instability in the ecosystem is its randomness. Finding the most suitable application can be quite a difficult task, along with this, users must have a certain skill in order to find the best option. According to experts, the challenge lies not only in building applications, but also in thinking about how ideally they can fit into the vast ecosystem of decentralized finance.
4. Popular DeFi projects
At the beginning of 2021, more than $30 billion was invested in DeFi projects, and after 10 months this amount reached a record $236 billion due to the rise in prices on the crypto market.
Uniswap is a decentralized exchange created to combat illiquidity in the cryptocurrency market. The platform and tokens run on Ethereum and other blockchains. A distinctive feature of UNI is that it uses the universal ERC-20 standard, which means cryptocurrency can be exchanged for other tokens.
Another popular project is Exon Center (https://app.exoncenter.com/751). The decentralized platform powered by Tron includes a complete ecosystem of the most important services in DeFi – Exon NFT (decentralized account in the ecosystem), Exon Swap (decentralized exchange with the lowest fees and highest profit for liquidity providers), Exon Farming (farming protocol with increased profit), Exon IDO (crowdfunding service with unique functionality), Exon Vote (decentralized ecosystem management service), etc. The team produces a lot of cool services that help close the questions of both investors and projects.
The complexity of DeFi lies not in the mechanism for depositing funds and generating income, but in the selection of quality projects. Therefore, experts advise remembering the risks and entering resource applications with a small amount.
Blockchain development is a growing demand in the startup world today. Feel free to contact us with any questions you may have regarding DEFI or other Blockchain development including funding for your project.