The Beginner’s Guide to Understanding DeFi, Crypto, and Blockchain
The Age of DeFi
So, you’re probably reading this because you’ve been thinking about dipping into the world of crypto or DeFi, but you’re not sure where to start or maybe you’re worried it’s almost too late to start building your crypto portfolio. Well, the reality is it’s an emerging time in the digital currency world as DeFi breaks new boundaries and opens brand new prospects on an international scale. But what is DeFi?
DeFi Opts for Unregulated Control of Data, Assets, and Favorability of Users
DeFi is merely an abbreviation for decentralized finance also sometimes referred to as open finance. DeFi is a relatively new concept to the digital currency exchange world. It quite literally takes the bank out of banking and puts users in the driver’s seat — DeFi is a subcategory of the crypto industry determined to provide decentralized financial service. This means all transactions on a DeFi platform are performed and received by users without the participation of a third-party overseeing or handling users’ info. These kinds of peer-to-peer interactions allow for overall higher profitability since they cut out the cost of transaction fees normally associated with authoritative controlled exchange forums. Decentralized finance is breaking the mold of traditional finance services regularly performed online by reworking the inner mechanisms of digital currency exchange altogether. This is due in part greatly to the construct of blockchains.
How Blockchain Builds a Fundamental Base for DeFi and Gives Users Free Reign Without the Authority of Central Management
DeFi is only possible because of blockchain technologies, but what is blockchain? Blockchains are the makeup or protocol of cryptocurrency, just like DNA is the “blueprint of life.” While blockchain software development has been ongoing since the 90’s, the first Bitcoin (the first cryptocurrency that was) wasn’t actually mined until 2009. Blockchain is a data construct with roots in cryptography that creates digital ledgers (think permeated timestamps for all to see) with mathematically hashed links, excluding the need for a central authority to enforce or approve any mandates. Technology that upholds such quantities of trust in the digital realm has been otherwise unheard of, thus making for a truly exciting revelation in the age of internet and computing. With blockchains, and specifically thanks to Ethereum (not to be confused with Ether) powered blockchains in DeFi, data cannot be erased. This factor ultimately allows for business to perform with the utmost sanctity in ways that were only previously feasible offline.
Keeping the Power in Blockchains
Info that was once confined to staying analog for sake of security can now be safely-digitally transferred. This extraction of authority yields a powerful database that gives users’ assets far more power and potential value than if they were trading within the confinements of a corporately controlled space. While there are many different types of blockchains, what’s important to know now is that blockchains operate with foremost data integrity. Massive communities of independent users contribute to and distribute from these networks with a reliance on each other to uphold high standards while simultaneously keeping complete control in the hands of its users. These users operate within a network of personally owned, high-power computers dispersed across various locations and referred to collectively as a node or full nodes.
DeFi vs. CeFi
To better understand the notion of decentralized finance let’s familiarize ourselves with DeFi’s counterpart: CeFi or (drumroll please…) centralized finance. You likely may have heard of CeFi asset management platforms like Coinbase, Libra (now Diem) and Binance more than once from your self-proclaimed crypto-guru colleague or nephew, but there’s a reason for this. They’ve been around a while and people can create accounts with these centralized exchanges in return for services rendered. CeFi finds favor with newcomers to the world of crypto-based heavily on the ability to trade with/for fiat currency (that’s just a fancy name for legal tender AKA your national or local government’s decreed currency: ie. coin and paper money in the physical or as it is held by banks in one’s personal checking or credit account).
Smart Contracts Help Define DeFi
DeFi not only transcends the jeopardizing qualities of CeFi entities (website crashes and scams), but DeFi outshines CeFi in terms of personal data security and overall protection. When you trade across a decentralized finance platform, you are the truly-singular owner of all your data. This means no sharing of personal account info and zero associated risks of ever facing a security breach or theft of funds. Smart contracts (specific sets of code) on these blockchain accounts ensure total autonomy of information while keeping pre-contracted transactions automatic for total reassurance on all ends. And when exchanges are made across DeFi they are done without permission from a third party company, so anyone can join a DeFi exchange in an open-source manner. These types of programs (or apps) that allow DeFi users to use smart contracts in conjunction with blockchain technology have earned the name of DApps (a portmanteau combining “decentralized” and “application”).
Better Access to Global Market Attained Through DeFi
Although cross chain exchange trading is widely available on the established CeFi platforms, DeFi does offer alternative options and is currently making strides with the likes of Bitcoin. Some new websites will allow users to use BTC (Bitcoin) as collateral or borrow Ethereum-based stable coins (crypto that’s designed with a tie to a value of a preexisting currency like the Euro to reduce volatility). The rising popularity of DeFi brings promise to those previous users of CeFi who were weary of weak verification systems and increasing consumer fraud, while also proving to be a more secure option for those looking to get started in crypto and DeFi. Thanks to DeFi, you can borrow against your crypto without having to fill out forms that get scrutinized by a centralized authority. You’re even able to lend and earn interest on crypto or trade crypto derivatives (think stock options). In the United States, access to credit is something that is often taken for granted, but in other countries where such access is less viable the peer-to-peer lending available through DeFi can provide a solution.
How Can You Get Started in DeFi?
You don’t even need a bank account to hit the ground running, but other than a computing device and a bit of know-how, DeFi is majorly accessible to you and everyone else. All you need is a crypto wallet and internet connection to get started in DeFi. One of our favorites is MetaMask. Simple to use and setup, plus it’s been battle-tested and survived the test of time. Next, you’ll need to access an existing DApp (unless you’re a well-versed coder and would like to develop one yourself). With over four thousand DApps available, a few DApps that are being met with heavy fanfare on the Ethereum blockchain include MakerDAO, Compound, Uniswap and Synthetix. Of course, we are biased, but if you want an easy-to-use multi-chain exchange, you can use SokuSwap.
You can also synchronize your wallet across various platforms using your own private key. Once you get started in DeFi, providing liquidity and loaning/pooling crypto will be in the palm of your hands. Always ensure a DeFi application is audited to best ensure your full security and gauge the transparency of each space. A sound resource to help you along the way is DeFi Score.
Crypto At its Core
Crypto or cryptocurrency has become a household term in recent years, but one that is met with heavy stigma and confusion. So, let’s take a quick dip into the building blocks of crypto to demystify this very real form of decentralized-digital money. Cryptocurrency is a blockchain-enforced, reconceptualization of money in the form of digital tokens. These tokens take on many different names (and subsequent values) which can be traded or stored in a digital wallet. Cryptocurrencies are void of inflation since they lack governing control. Today you can add to your blockchain wallet on Venmo with as little as $1 or even at Walmart via Coinstar Machines!
While the layperson may perceive crypto to be nothing more than a megatrend, the fact of the matter is that DeFi has created a platform for cryptocurrency to unify all currency exchanges across the globe via the power of the internet. This essentially means that by means of DeFi any transaction anywhere in the world can occur in the same language regardless of origin or destination. Pretty cool! All anyone needs to achieve this unrestrained level of universal capability is a smartphone or computer with internet access. DApps are available to everyone, everywhere with the same presentation and results regardless of local regulations (for the most part).
Future of Finance
The future of DeFi and cryptocurrencies in this environment is inspiring, as their efficiencies in money transferring have proven far more cost-effective and speedy than traditional wire transfers. DeFi is truly a worldwide relief to any traditional finance service we know: banking, trading, insurance, savings, loans, etc. Decentralized insurance protocols have already gone underway to prevent losses that may occur from smart contracts being hacked in the future. With the extension of more stable coins and decentralized exchanges, new DeFi products will only grow on top of each other exponentially. DeFi’s reach is limitless and will surely play a grand role in the greater whole of the global economy as it rises to prominence. DeFi is undoubtedly the future of money as we will come to know it.