What is DeFi in the cryptocurrency world?
The fast differences and dynamic development of new solutions that we observe in the world of cryptocurrencies also increase the interest in using them among investors. DeFi, i.e., decentralized financing, is worth learning more about. What is worth knowing about DeFi and its role in the cryptocurrency space?
- What are the reasons behind the immense popularity of DeFi?
- DeFi and cryptocurrencies – how to define them?
- Who is the creator of DeFi?
- What is DeFi in stock trading?
- What are some examples of DeFi? Which tokens belong to DeFi?
- Is Bitcoin a DeFi token? Is Ethereum part of DeFi?
- How many DeFi protocols are currently in circulation?
- Is it profitable to invest in DeFi?
- How do you make money using DeFi?
- How to invest in DeFi? Where to start?
- Where can I buy DeFi? How much is the value of DeFi tokens?
- What is the best DeFi token?
Why has DeFi gained so much popularity?
Decentralized finance, or DeFi, is directly related to applications based on blockchain technology that process various types of financial transactions. So far, this function rested with brokerage houses and banks, which acted as intermediaries.
Thanks to the solutions provided by DeFi crypto applications, users gain greater control over their transactions. Moreover, this alternative offers much greater flexibility in operations and generates much lower costs. DeFi allows you to manage your finances freely without the participation of third parties or special supervision while ensuring the anonymity and security of each party to the transaction. Thanks to the open ecosystem, DeFi becomes a solution that provides everyone access to the financial system- which is impossible in the traditional system.
DeFi and cryptocurrencies – how do you define them?
DeFi, which is associated with, among others, decentralized cryptocurrency exchanges and stablecoins, allows, among other things, the conclusion of smart contracts, i.e., digital contracts based on secure network protocols. We can successfully operate on any cryptocurrency using DeFi applications (so-called apps), provided that they can implement smart contracts.
Defi applications, i.e., basically every smart contact implemented on the blockchain, allow for tasks such as:
- taking out and granting loans,
- investing in cryptocurrencies and their derivatives,
- earning interest,
- cryptocurrency trading through peer-to-peer (P2P) transactions,
- insurance or free asset management.
Who is the creator of DeFi?
DeFi was created in 2018 on the initiative of a group of entrepreneurs and developers of the decentralized Ethereum platform, whose intention was to open applications financed from traditional systems. The entire Ethereum concept was first described in 2013 by its creator, Vitalik Buterin.
What is DeFi in stock trading?
Decentralized financing DeFi is a cryptocurrency version of a stock exchange, but it is much more than that, as it includes lending platforms, forecast markets, and other similar instruments. Its task is to create a new financial system that will be safer and more flexible, unlike the traditional solutions we know so far. The decentralized version of the cryptocurrency exchange is a departure from the bureaucracy and regulations governing the existing financial system and, therefore, accessible to everyone.
What are some examples of DeFi? Which tokens belong to DeFi?
DeFi and its examples cover an extensive range of solutions, and a DeFi token can be any cryptocurrency that powers a decentralized exchange, lending protocols, and digital advertising platforms. DeFi coin and DeFi tokens are terms used interchangeably. Still, there are some differences between them – coins operate within their blockchain, e.g., ETH is a DeFi coin in Ethereum, where it is the required currency. DeFi tokens, in turn, can use an existing blockchain, which means they do not need a single currency to conduct transactions.
Examples of DeFi include:
- Decentralized exchanges – DEX DECETRALIZED EXCHANGES A place where you can freely exchange cryptocurrencies, stablecoins, and other fiat currencies. These are peer-to-peer exchange platforms allowing direct transactions (without intermediaries). Platforms of this type include Bancor, Uniswap, PancakeSwap and SushiSwap.
- Lending platforms, i.e., DEFI LOANS, are spaces where you can obtain a loan for a company privately without any intermediaries. They also allow you to earn money on accepted cryptocurrencies or stablecoins. The lending platforms include, for example, AAVE, DDEX, Cream, Compound, Fulcrum, and dYdX.
- Decentralized stablecoins This is a solution that helps achieve price stability, which can vary significantly in the case of cryptocurrency fluctuations. They can monitor funds based on FIAT currencies (dollar, euro, or British franc), increasing asset price predictability.
Numerous types of DeFi tokens are included in the DeFi examples mentioned above. Four of them deserve special attention:
- Ethereum (ETH)
The first blockchain was introduced into intelligent contracts, offering over 200 DeFi applications for granting and lending, decentralized trading, and yield farming, i.e., generating profits by sharing part of the collected cryptocurrencies. ETH is technically a coin, but its usefulness is unrivaled because it allows you to pay fees for each transaction on the network. For end users or programmers, this solution can be expensive. Hence, they use other blockchain options such as Cardano (ADA) and Avalanche (AVAX), but their popularity is growing among institutions.
- Aave (AAVE)
The AAVE token is an option that allows you to earn and borrow cryptocurrencies sup, ports blockchain networks such as Ethereum, Avalanche, and Polygon, and enables the use of various cryptocurrencies. Users of the token can influence the protocol’s future through the AIP improvement proposal system. Maker (MKR) and Compound (COMP) are similar tokens to AAVE.
- SushiSwap (SUSHI) and DEX
This decentralized exchange operates on the Ethereum blockchain. You can use a wide range of ERC-20 tokens here. Similarly to the above, it offers the possibility of management and additionally provides its users with attractive prizes.
- Basic Attention Token (BAT)
This solution is entirely different from the above because it works in other sectors of the economy. Users can additionally earn money by receiving advertisements from network partners.
Is Bitcoin a DeFi token? Is Ethereum part of DeFi?
Bitcoin is the prototype of all cryptocurrencies, so it is a basis for DeFi. Because DeFi covers a wide range of both simple and complex financial transactions, it is powered by decentralized applications ‘apps’ or programs known as protocols. These forms support transactions in two basic currencies, Bitcoin (BTC) and Ethereum (ETH).
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Most applications are based on the Ethereum blockchain, which was created as a platform for smart contracts, automatically executing transactions when users meet certain conditions. DeFi is, therefore, based on Ethereum (alongside Bitcoin), which makes them complement each other. One does not belong to the other.
How many DeFi protocols are currently in circulation?
DeFi is decentralized financing that transforms traditional financial products into trusted and transparent protocols without unnecessary intermediaries. Currently, over 200 DeFi protocols are on the market, most of which use Ethereum. The most promising include:
- Maker (MKR), Compound (COMP),
- Loopring (LRC),
- SushiSwap (SUSHI),
- Yearn.Finance (YFI),
- Curve Finance (CRV),
- Kyber Network (KYC),
- Bancor (BNT).
Is it profitable to invest in DeFi?
DeFi platforms are an alternative that allows you to borrow, save, and trade cryptocurrencies without standard solutions and intermediaries. This freedom makes this option extremely attractive for many users. On DeFi, we can successfully generate passive income from loans, obtaining interest and profit on many other levels (DeFi stock exchange or DeFi Farming). As with any additional investment, this option may also carry some risk, so people new to the world of cryptocurrencies should start with DeFi by diversifying their crypto portfolio. With experience, this game can give a lot of satisfaction and attractive financial benefits after developing a good strategy.
How do you make money using DeFi?
You can make money with DeFi in several ways:
- Through the passive income method – just like in the case of a savings account in a bank, we can earn money on the funds saved. By blocking specific amounts on your account and allocating them for staking, you receive tokens in exchange for your trust.
- By ensuring liquidity – by blocking funds in your account and making them available to other users in exchange for a commission (as well as rewards in the form of tokens), you can earn a lot, but as is the case on the stock market – you can also lose here due to instability and price fluctuations.
- Yield farming can earn money on tokens locked in liquidity pools. Rewards and earned funds are obtained in the used or other token. To be safe, you should invest your funds on platforms with a good reputation.
- Granting loans are based on a smart contract, and the lender earns on interest. In this solution, you can gain easier access to assets than in the above options – including the possibility of withdrawing them. The risk of granting loans is lower because smart contracts regulate them.
Where can I buy DeFi? How much is the value of DeFi tokens?
DeFi can be purchased on centralized and decentralized exchanges, but when choosing a platform, you should do it carefully. The sale and purchase of DeFi tokens should be carried out on trusted and reliable exchanges. Coinbase or Binance are among such options. DeFi Coin always shows the current value during a financial transaction, similar to a digital version of a fiat coin.
What is the best DeFi token?
Among the best DeFi tokens in 2022 are:
- Tamadoge (TAMA),
- Battle Infinity (IBAT),
- Defi Coin (DEFC),
- Lucky Block (LBLOCK),
- Avalanche (AVAX).
However, more promising projects will undoubtedly appear. Therefore, closely follow the DeFi market and news from the world of cryptocurrencies, such as the cryptocurrency ranking.