Decentralized finance is at the core of the crypto revolution. Or so the hype says. In the year in which the world woke up to the reality of cryptocurrency as something other than a combination of techie plaything and tool of criminals, DeFi stood out, reports PYMNTS.
About DeFi
With $100 billion invested, it’s far too large for mainstream finance to ignore. DeFi is, in many ways, cryptocurrency at its purist: A financial tool that needs neither banker nor bank, nor broker nor brokerage.
It is a wholly peer-to-peer way of doing what the financial institutions have been doing for centuries — providing a source of trust — without having to pay the tithe demanded by a trusted third party.
Decentralized exchanges (DEXs) can offer trades and derivatives cheaper and faster than even “centralized” crypto. And the lending and borrowing platforms can provide both the lenders and the borrowers far better rates than any bank.
What Are the Top DeFi Platforms?
DeFi is the most rewarding and riskiest part of the blockchain revolution, which perhaps explains why $3.7 billion has been invested in a project with a name like “SushiSwap.” The number of DeFi projects is growing exponentially and bringing a lot of fraud and failure along with its success.
What Is a Smart Contract?
Smart contracts are the building blocks of DeFi. Of course, that’s true of any blockchain project that isn’t a pure cash replacement, from NFTs to supply chain management tools. The self-executing contracts are immutable. Once agreed to and the funds locked in, the contract will be paid without the need for a trusted intermediary and cannot be changed or canceled.
What is Yield Farming and Liquidity Mining?
Yield farming and liquidity mining are the ways of putting your crypto to work for you. DeFi lending platforms and DEXs use liquidity pools to make loans and trades rather than matching a borrower with a lender or buyer with the seller.
Crypto locked into these pools earns interest and fees. There are a lot of variations on this simple theme, some far more complex and lucrative — or damaging.
What is Staking?
Staking is the new mining, a way of validating transactions and adding them to a blockchain that is far faster and more energy efficient than slow, polluting Bitcoin. Far more scalable than mining, staking is what’s needed to let blockchain compete with the likes of Visa as a transaction processor. It’s also a good way to earn passive income with your crypto.
Governing the Ungoverned: Unpacking DeFi and DAO
DeFi platforms run without any central control or human interference. So how to make changes — say fix a bug, change an interest rate, or add a cryptocurrency trading pair? By voting, of course. Thus the decentralized autonomous organization, or DAO, which is a smart contract controlled governance system.
DeFi’s Very Real Risks
The idea of DeFi is that there is no central control at all – no human interference, no trusted third party of any kind. Nothing can be done when something goes wrong, from fraud to an expensive typo in a hastily written smart contract. And that’s not the worst of the risks — fraud, market manipulation, frequent and fast margin calls. DeFi has plenty of risks.
What Are the Top DeFi Blockchains?
DeFi is built on Ethereum, and Ethereum can’t handle its success. The No. 2 blockchain has gotten jammed by the number of transactions DeFi is sending it, making it slow and transaction fees sky high.
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Source: PYMNTS
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