DeFi 101 Basics
DeFi 101 Basics
Learn the basics about Decentralised Finance
What is DeFi, anyway?
DeFi is short for Decentralized Finance and it is a disruptive technology that aims to be the new financial system. DeFi is open, permissionless, transparent to everyone, and doesn’t require the need for centralized intermediaries.
DeFi is powered by smart contracts and applications that were first introduced by the Ethereum blockchain and then adopted by every blockchain since. DeFi started on Ethereum because it was the first blockchain that allowed code to execute logic, enabling the creation of smart contracts. It has come a long way since then and still has a long way to go. But one thing that’s clear about DeFi is that it is a resilient and immutable space that is incredibly disruptive to the modern financial system we know today.
Decentralize Finance vs Traditional Finance
What is a Blockchain?
A Blockchain is a secure and transparent database that allows multiple parties to share and access the same data without needing a central authority. Modern blockchains allow users to execute complex code called smart contracts, in addition to just sending and receiving coins. This makes it ideal for DeFi, which allows people to access financial services directly, without intermediaries, and take control of their own financial lives. DeFi uses smart contracts to automate complex financial transactions, making it possible for people to access financial services without intermediaries.
Gas fees are Blockchain transaction fees paid to network validators for their services to the Blockchain. Without the fees, validators would have no incentive to help secure the network and process transactions.
What is Dapp?
Dapp is short for Decentralized Application. A Dapp refers to an application that runs on a blockchain. Dapps are essentially a set of smart contracts that execute transactions using a blockchain network the Dapp is built on. This makes dapps censorship-resistant, immutable, and have little to no downtime, as long as the blockchain that hosts it is still running.
What is an Oracle?
An oracle is an external service that provides data to smart contracts. Oracles are very important because the smart contract itself has no access to data outside of on-chain data. By providing high-quality data that is harder to manipulate, Oracles enable smart contracts to create more complex services.
Securely processing things like lending protocols or synthetic assets is only made possible by oracles providing real-time data feeds from multiple sources.
DeFi Use Cases
DeFi has a wide range of use cases. Across several verticals, DeFi has unlocked new opportunities for economic activity. Currently, most DeFi activity comes from stablecoins, decentralized exchanges (DEX), lending protocols, and marketplaces.
Stablecoins
A stablecoin is a type of crypto asset that has its value pegged to the US dollar. Stablecoins help provide safe havens to market participants looking to avoid crypto market volatility.
Examples of popular stablecoins are USDC, USDT, DAI, BUSD.
Decentralized Exchange (DEX)
A Decentralized Exchange (DEX) is a platform that allows users to swap one crypto asset for another, without a middleman processing the transaction. Whether you're trading Bitcoin, Ethereum, or a stablecoin like USDC, a DEX gives you the power to control your own assets and make instant peer-to-peer transactions in a secure and private environment.
Lending
Lending protocols are smart contract-based systems that allow lenders to earn interest on their crypto while providing borrowers with access to capital. These protocols are essentially money markets, or similar to banks where you take out loans. When using a decentralised lending protocol, users are never required to undergo KYC or credit checks. The protocol automatically determines the interest rate for lenders and the borrowing amount for borrowers based on their collateral, making the process convenient and efficient. Lending protocols allow for the lending and borrowing of various assets, making it a versatile tool for managing and growing crypto holdings.
NFT Marketplace
A marketplace is a platform where individuals can trade ‘non-fungible tokens’ with one another in a trustless manner without needing a middleman. Smart contracts make this possible by enforcing the rules on each side of the trade. NFT marketplaces offer buyers and sellers a platform to transact with one another, solely relying on code to process and validate the transaction.
DeFi Risk
The rapidly evolving landscape of DeFi comes with disruptive shifts and enhancements to the way we interact with financial systems today. However, it also comes with risks. DeFi has been plagued with smart contract security problems since its inception, which can be catastrophic if a protocol is exploited and drained. These risks can be mitigated through audits and other security measures but the rapid pace of evolution means that often, developers are launching new products and services with haste and this fast-pace can sometimes mean, mistakes are made.
Conclusion
DeFi brings a huge paradigm shift to the way people interact with their finances. It brings about a trust-minimizing, more neutral, and open financial system through the use of blockchain technology. DeFi empowers the entire globe to have access to a fair and transparent finance system, with the only requirements being an internet connection and a cryptocurrency wallet. However, DeFi also has its own unique set of risks to be considered and mitigated, since the space is still nascent.
About Trader Joe
Trader Joe is a one-stop-shop decentralized trading platform native to the Avalanche blockchain. Trader Joe offers a comprehensive DeFi platform where you can Trade, Lend and Leverage, participate in a Launchpad and shop for NFTs. Visit Trader Joe and discover what DeFi can really offer.
Trader Joe Twitter | Joepegs Twitter | Discord Community | Decentralized Exchange