“Decentralized Finance” is often known as Defi in the Crypto world. Before getting more into Defi, let us understand what are the different centralized products available in the real world? Products like Lending & Borrowing, Deposits, Markets, Insurance, etc., to name a few of the financial products offered by many Banks, Financial Institutions, FinTechs, etc.,
The point to be noted in the real world is these products are governed under different regulatory frameworks, offered by different entities, and are permitted to certain regions. Like a Bank in the UK may not offer its products completely to customers in the US.
In Defi, finance products such as Lending, borrowing, Deposits, insurance, etc., can be offered by decentralized applications (DApps). Ethereum is the first and pioneering platform that offered the flexibility to write digital contracts on top of a blockchain. A Digital Contract will be executed only when the conditions on the contract are met. For Example, if you want to sell a house at an “X” rate and someone wants to buy that house only when “Y” condition (say road connectivity established) to house. The contract will get executed if said “Y” condition is met and transfer of funds will happen.
Seems simple right? it is not so simple as it seems since most of the digital contracts are written in Solidity programming language and a common user may or may not have the capability to read the contract and understand it.
However, the Defi segment in the crypto space is booming these days, especially after the tremendous success of Yearn(YFI) finance which offered investment products by staking the Tokens, LP Tokens there by users earning cryptos either in YFI or other coins basis on farming/pool in which users have invested their cryptos.
Ethereum has given rise to a lot of Defi platforms that were built on top of this blockchain. Quite a good number of such projects have been succeeded. At one point, the YFI token has taken over Bitcoin in terms of price, such is the success of the project in its primetime.
Exchange services offered by Uniswap had made it the top Defi exchange and Uniswap too offered Staking where users can provide liquidity on its Dex and earn UNI token. Due to a huge spike of transactions in Uniswap, the complete Ethereum blockchain has been choked. Hoping to see a free flow of transaction with Uniswap V3 and Ethereum 2.0
PancakeSwap finance is a close competitor to Uniswap in terms of the highest number of transactions that happened on DEX. Pancakeswap is built on top of Binance Smartchain (offers a similar feature like Ethereum with BNB being native coin for processing of transactions). There are a lot of apps available in the Binance Smart chain as well as on other blockchains which offer different Finance products on the blockchain and users can earn from it with a high percentage of returns.
There is no doubt that the Defi platform is soaring with the highest APY’s ever seen. However, there are associated risks with this, as there is a lack of transparency, and many DApps platforms anonymously. As discussed above, contracts are written in Solidity and users will not enough technical capability in interacting with contracts. Investors are expected to exercise caution while interacting with Defi platforms as there associated risks like Impermanent losses, loss, theft, etc., are associated with this.