What Is DeFi in Crypto? Is Decentralized Finance the Future?

April 27, 2022

Crypto World

Ana Rojas

What is DeFi in crypto world? In cryptocurrency, DeFi means decentralized finance. What is decentralized finance? It’s an umbrella term that engulfs those cryptocurrency projects that are geared toward building a brand new, internet-native financial system that will work on blockchains. DeFi aims to replace the traditional banking mechanisms.

To send or receive money through traditional systems, you need intermediaries, like banks or stock exchanges. You also have to be sure that those intermediaries are honest and will transfer your funds to a third party. Sometimes, it creates a lot of chaos, misunderstanding and eventually leads to financial losses.

In DeFi, however, those middlemen are replaced by software, in our case, blockchains. People happily trade directly with one another, with blockchain-based “smart contracts” (another popular term) doing the work of making markets, settling trades and ensuring that the entire process is transparent and 100% legit. DeFi also includes things like lending platforms, prediction markets, options, and derivatives. 

What Are the Benefits of Decentralized Finance?

The transparency that the blockchain offers is one of the greatest benefits of decentralized financing. Other benefits include things like:

• DeFi finance is inclusive. If you have a crypto wallet with several types of coins in it and a good Internet connection, you are welcome to use DeFi crypto services.
• Smart contracts are highly programmable and can be designed to automatically execute, based on an infinite number of variables.
• Transactions are in real time. The underlying blockchain is updated the moment a transaction is completed.
• Many DeFi protocols are open source. Ethereum and other projects are built with open-source code, which is available for anyone to view, audit and build on.

What Does Decentralized Finance Do?

There are several types of applications of decentralize finance. These are, for instance, decentralized crypto exchanges (DEXs). DEXs are blockchain-based apps that coordinate large-scale trading of crypto assets between many users. They do that entirely through automated algorithms, instead of the conventional approach of acting as financial intermediary between buyers and sellers.

Next come crypto lending platforms that enable users to lend and borrow cryptocurrencies from one another, trade, and earn interest. They essentially allow users to enlist their crypto coins on the platform for lending purposes. 

It also includes “Wrapped bitcoins” (WBTC). Wrapped cryptocurrencies enable crypto assets to be used on blockchains to which they are not native. Wrapped Bitcoin (wBTC or WBTC) was launched in 2019. To obtain wBTC, you must request the tokens from a merchant that will then initiate a transaction with a custodian, who mints wBTC tokens and sends them to the merchant. Next, you swap your bitcoin for wBTC with the merchant via a centralized exchange (CEX), decentralized exchange (DEX), or atomic swap. Only merchants can redeem wBTC for BTC.

One of the popular DeFi applications is prediction markets. They are available without a third-party to administer trades and bets. In general, prediction markets let users make a choice whether something will or will not happen. In the finance world, participants trade with contracts where the payoff will vary depending on the outcome of a future event. Prediction markets make the result of such a future event tradeable.

Is Ethereum DeFi?

Well, most of the financial services that could be defined as DeFi can be found on the Ethereum network, the second-largest cryptocurrency marketplace, which also acts as a platform that allows other blockchain apps to be built on it.

Is DeFi a Good Investment?

Decentralized finance (DeFi) is tipped to be the next big thing in the cryptocurrency and blockchain technology arenas. One can freely invest in one or several cryptocurrencies that run on blockchains that are considered to be decentralized finance. 

What Are DeFi Coins?

Here’s a short list of the best DeFi coins to invest in:

• Aave (AAVE) is an early open source DeFi protocol that’s expanding across a number of new blockchains. Backed by a Swiss company of the same name founded in 2017, Aave is an open-source protocol for borrowing and lending crypto. It now has $18 billion in total value locked or deposited. At the moment AAVE costs $172.23.
• The Graph (GRT) is a data query marketplace built on the Ethereum blockchain that powers many of the most used dApps in the DeFi and broader Web3 ecosystem, including Uniswap, Synthetix, and CoinGecko. Customers of The Graph Network spend GRT tokens to query various datasets. At the moment GRT costs $0.3565.
• Terra (LUNA) is a blockchain founded in January 2018 that launched its token in April 2019. The network was built using Cosmos SDK and focuses on creating stablecoins. Terra’s native token LUNA acts as the collateral for Terra stablecoins, which are convertible back into LUNA. This method differs from fiat-backed or over-collateralized stablecoins. At the moment LUNA costs $90.12.
• Chainlink (LINK) is a cryptocurrency and technology platform that enables non-blockchain enterprises to securely connect with blockchain platforms. Chainlink is middleware that connects blockchain-based smart contracts with external data, such as baseball scores or stock prices. At the moment LINK costs $12.71.
• Compound (COMP) is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications. It enables users to earn money on the cryptocurrencies they’re saving. The project is part of Ethereum. At the moment COMP costs $126.09.
• Synthetic (SNX) is an Ethereum-based token focused on creating synthetic assets through decentralization. The Synthetix platform is a trading platform for synthetic assets which is built on top of the Ethereum blockchain. They offer a number of different asset categories to choose from such as Fiat currency stablecoins, cryptocurrencies as well as commodities like gold and silver. At the moment SNX costs $5.96.
• Balancer (BAL) is an emerging decentralized finance (DeFi) protocol, Balancer uses a combination of crypto assets to provide this service, enabling trading without a financial intermediary like an exchange. Balancer works in a similar fashion to other decentralized exchanges (DEXs) like Uniswap (UNI). At the moment BAL costs $14.87.

Where to Buy DeFi Crypto?

So, how to invest in DeFi? If you already have savings in crypto that you want to convert into crypto coins that are part of decentralized finance, just go to StealthEX and follow these simple steps:

• Choose the pair and the amount for your exchange. For instance, BTC to LINK coin.
• Provide the recipient address to which the coins will be transferred.
• Move your cryptocurrency for the exchange.
• Receive your Chainlink coins.

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Please make sure to always research any cryptocurrency and assess your risks before you invest.