What is DeFi and How does it Work?

What is DeFi and How does it Work?

What is DeFi

DeFi platforms such as Celcius Network, allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, and earn interest in savings-like accounts. Some DeFi projects promote extremely high-interest rates but are subject to high risk. As of May 2021, the TVL (Total Value Locked) in USD was $79,55B, or roughly 16.59% of the total DeFi market. DeFi Pulse is a great place to find the latest analytics and rankings of DeFi protocols.

How does DeFi work
How does DeFi work

Total Value Locked in DeFi (source-Defi Pulse)

How does it Work

These days, there are many different types of DeFi apps out there and they can get rather complex. A few common types include Lending Platforms, Decentralised Exchanges (DEX’s) and Yield Farming.

One such example of a DeFi protocol (a DEX, in this case) is Uniswap (UNI). Uniswap, as its name implies, is a decentralised exchange where different tokens can be exchanged or swapped. You can access the uniswap app via a web 3.0 browser extension or application such as Metamask wallet. We have a detailed How-to guide on Metamask Wallet here. Users can then directly interact with the Ethereum blockchain via the uniswap app.

See DeFi work in real life, with Uniswap and Metamask.

DeFi Examples

DEX’s, or Decentralised Exchanges. Some of these include Uniswap, Pancakeswap and Sushiswap. We will take a detailed look at Uniswap in the next section.

Yield Farming. Yield farming allows you to stake or invest your crypto for a return on investment or yield. Rewards or interest in yield farming is often earned in more crypto. However, yield farming often also involves moving your crypto around all the time between different marketplaces to maximise your return. Examples of these include Yearn Finance, Venus and Pancakeswap again.

Derivatives. We won’t go into too much detail with derivatives for now. basically, these protocols, such as Synthetix, allow you to gain on-chain exposure to a vast range of assets. Synthetix, the derivatives liquidity protocol, calls itself the backbone for derivatives trading in DeFi.

Celcius Network -Download the app

Uniswap

Why DeFi

While, in the DeFi space, this is not required. The entire transaction is built on smart contracts which execute upon certain predetermined parameters. In other words, it is a trustless, immutable (unchangeable) system.

The second reason is the major adoption by institutions of DeFi and major cryptocurrencies like Bitcoin and Ethereum. The most prominent of the institutions is the Asset management firm, Grayscale, the worlds largest crypto fund. They now hold over total Assets Under Management (AUM) of approximately $50 Billion.

Conclusion

Regulation isn’t all bad for the consumer. DeFi is still a risky play for the most part. A lot of people still don’t know how it works. Mostly, people tend to lose some money before they get past the learning curve. The other issue with an unregulated market is, there are always scammers out there trying to scam people out of their money.

So do your research and due diligence and you should be fine. You should just try to get involved. Try staking some crypto, try getting a crypto-backed loan, even if it’s only $100 or $200. The point is, just get involved. Because this space is evolving quickly and it isn’t going anywhere but mainstream.

Exchanges that we use:

- Binance
- Bittrex
- Kucoin
- Poloniex
- CEX
- Altcointrader (Check out our review of Altcointrader.co.za here)

Real Estate Professional by day — Crypto Blogger by night. Self-proclaimed Beer enthusiast. https://bitmarkcrypto.com https://twitter.com/mark_thiel