What is Defi?

Understanding DeFi: A Quick Guide

What is Defi?

DeFi stands for decentralized finance. A simple way to explain DeFi is that you make money by lending your money or assets to someone and earn interest on it. Basically, DeFi removes the traditional middleman, usually the bank, and connects borrowers and lenders directly.

To help the transaction happen Defi uses smart contracts.

We can divide the crypto world into three essential layers when discussing DeFi.

  1. Blockchains: There are many different blockchains, but they all aim for similar goals. Here, we'll focus on smart contract blockchains, which are key for decentralized finance (DeFi). Smart contracts let DeFi work by using code to create agreements, like lending or trading, between people who don't know each other.

    There are various smart contract blockchains, each with unique assets, platforms, applications, yields, and risk profiles. Here are the main ones:

    • Ethereum

    • Polygon Matic

    • BNB coin

    • Avalanche

    • Cardano

They are different blockchains, some of them have better yields than others and higher fees than others.

  1. Applications: Built on top of these blockchains are applications. These applications let me connect with someone I don't know. Both of us can enter into a financial contract.

    There are currently two main types of applications on blockchains:

    • Exchanges

    • Lending

In finance, most of the time, you either exchange something or lend something to someone else.

There are two sides to lending

  • Borrow: You can borrow it because you need that to buy something and you have to pay interest on it or

  • Lend: You can lend assets out to earn interest from borrowers

and Defi lets us be on both sides of lending on Exchanges

  1. Assets: Smart contract blockchains can handle different assets, like dollar stablecoins such as USDC or USDT, making it easy to trade or lend dollars on various blockchains. Even though Bitcoin isn't a smart contract chain, you can create wrapped versions of Bitcoin to use in DeFi on these platforms. Each blockchain also has its own token, like BNB on Binance, which you can invest in and use within its DeFi system to potentially earn extra returns.

As the DeFi space continues to grow and evolve, it promises to democratize access to financial services, offering more people around the world the opportunity to participate in a global, decentralized financial system. Whether you are a borrower looking for funds or a lender seeking returns, DeFi opens up a world of possibilities that are both innovative and transformative.

By understanding and engaging with the fundamental layers of DeFi—blockchains, applications, and assets—you can navigate this exciting new financial landscape and potentially reap the benefits of this cutting-edge technology.