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Decentralized Finance (DeFi) is Cryptocurrency trading The business focuses on decentralized financial services. It includes several financial services created by developers that everyone can access. DeFi solutions And centralized solutions are different in all aspects. The most important feature is that the decentralized solution is governed and controlled by a group of participants through the decentralized network. Therefore, unlike centralized services, decentralized services allow customers to fully control their funds.
Almost every week, new decentralized and non-custodial financial services are introduced to the DeFi industry, which is a center of innovation. The best part is that anyone can access such services from all over the world.
According to data from the World Bank in 2017, it is estimated that 1.7 billion adults worldwide will not have a bank account. In other words, they did not use the services of any financial institution. There is no entry standard for financial services based on the DeFi protocol. This means that everyone can use their services. The only barrier to entry is lack of knowledge.
this DeFi ecosystem The layer is on top of an open distributed network and utilizes smart contracts. A smart contract is an automatic execution agreement defined in the code line, which ensures free and open access to financial services.
DeFi protocols: how to use them
Several DeFi protocols are being developed on Ethereum or Binance Smart Chain. The number of rival blockchain networks that allow smart contracts has been increasing. So before choosing to use DeFi services, choosing a network is not easy.
Most broad protocols now support multiple blockchains, and the notable differences are transaction fees and ease of use.For example, Binance Smart Chain, Ethereum and Polygon It can be accessed through wallet extensions such as MetaMask. Switching the network is as easy as changing some parameters.
Users can use these wallet extensions to access their assets directly from the browser. Their installation is similar to other extensions, usually requiring the user to import the current wallet or use the private key to create a new wallet. They are also password protected to ensure high-end security. In addition, some of these wallets have built-in web browsers.
In addition, these wallets usually contain mobile applications that provide access DeFi project. These applications are wallets with a built-in browser that can be used to interact with DeFi applications. Users can synchronize their wallets by first creating a wallet on one device and then exporting the private key from another device.
Such mobile applications often include an open source Wallet Connect protocol for the convenience of users. By simply scanning the QR code with a mobile phone, the protocol allows users to connect their wallet to the DeFi desktop application.
Steps to start DeFi
Let us look at the steps that can help you get started with DeFi.
Step 1: Estimate how much you want to spend
If you research and read all available protocols and technologies on a global scale, but cannot make actual investments, it will be an absolute waste. So please save yourself some time and decide in advance how many dollars you are willing to invest.
Step 2: Convert fiat currency to cryptocurrency
You need a portal to convert your fiat currency into cryptocurrency, and then you can do anything in DeFi or cryptocurrency.For this, you need to use something like Binance or Coin BankThere is no way, you must pass CeFi first to use DeFi. Then, transfer some money to the newly created account.
Step 3: Centralized Finance or Decentralized Finance
Decide whether you want to use centralized or decentralized financial services, because you own some tokens.You don’t have to manage your Crypto wallet With CeFi, there is no need to worry about forgetting your password or private key. In a given location, the return rate of stables may be around 8%. If you persist, no further diving is necessary.
Nexo, Celsius, BlockFi, Lending on FTX/Binance/Bitfinex/Poloniex, Hodlnaut, etc. are just a few examples of CeFi.
Step 4: Open a cryptocurrency wallet
Maybe you are more tech-savvy and want to take advantage of the better returns provided by the many new agreements. Therefore, it is time to buy a cryptocurrency wallet for yourself. Metamask is very popular and is used in wallets that interact with DeFi protocols. To ensure your private key is safe, please download the wallet and process all instructions.
Step 5: Choose the protocol and chain you want to use
Bitcoin, Ethereum, Binance Smart Chain, Solana, Polygon, Arbitrum, Fantom, Avalanche, Celo, etc. are some of the available chain options. Each chain has its own advantages, disadvantages and gas costs. If you only invest a few dollars, Ethereum is not for you because transaction fees can be as high as hundreds of dollars.
Step 6: Risks associated with the agreement
Since each agreement is not equivalent, the yield between them varies greatly. Things with APY of 1 million% have certain red flags. Before investing in your cryptocurrency, you must understand these signs. The agreement between AAVE and Compound has existed from the beginning, and the output is low, but the risk is small.
Before you start using the protocol, you need to pay attention to the following points:
- Is the identity of the founder known or unknown?
- Does the founder have a track record of success?
- What is the degree of decentralization of the protocol?
- Check the code for errors?
- What is the history of the agreement?
- Do well-known venture capitalists provide funds for the team?
- Has the agreement been hacked?
- Are team members active on the communication platform?
- Is the income reliable?
- Possibility of impairment damage
- What is the cost of natural gas?
- Are you familiar with the program and what it claims to be able to perform?
- What is the source of income? Is it your base token or a different token you got?
Step 7: Continue to monitor your investment
After depositing your encrypted assets in certain agreements, you need to design tracking tools to monitor your account activity. Mining pools either continue to optimize or terminate, so DeFi is not really a once-and-for-all solution. In fact, for a better understanding, you can learn the basics of DeFi and even choose some DeFi certification courses.
DeFi tools: decentralized applications (daaps) and smart contracts
For example, smart contracts can be used to create loan agreements between two parties. If certain conditions are not met, the collateral may be liquefied. These programs are automatically executed by computer code without intermediary.
Smart contract is a blockchain-based algorithm that can be automatically activated when certain specifications are met. Therefore, smart contracts enable developers to develop more complex functions than simple cryptocurrency transactions.
On the other hand, decentralized applications (dapps) are built using such smart contracts. Dapps are like ordinary applications because they perform similar functions. The main difference is that they operate on a peer-to-peer network, such as a blockchain, which means that there is no single agency controlling the network.
The threat of DeFi
Decentralized finance like Bitcoin is still in its infancy.according to DeFi pulseAt present, the total value locked in global DeFi agreements is approximately US$107 billion. As a new upsurge in the crypto market, this technology has pros and cons. This technique proves to be beneficial, but you cannot ignore its shortcomings.
Some disadvantages are:
- Attack and fraud: DeFi is still in its infancy, so it is vulnerable to attacks and fraud (such as carpet pull). In the carpet pull threat, the hacker withdrew a funding channel. Since many DeFi platforms are based on open source smart contracts, hackers can effortlessly investigate vulnerabilities in these networks. Speaking of the most recent case, in July, hackers broke into the DeFi platform Poly Network and carried out the world’s largest cryptocurrency robbery. They stole $613 million worth of digital assets and then returned $260 million worth of tokens in less than a day.
- Lack of backup options: Unlike your bank account, DeFi and Bitcoin wallets require private keys to ensure security. The private key is a long, unique code that only the owner of the wallet knows. A great way to enhance security. But if you lose your private key, you will never get back your assets.
Protect yourself
The DeFi field is thriving due to innovation, and like ICO (Initial Token Offering), malicious elements are seeking to exploit customers and maximize their income through various scams. However, first, it is critical to verify that a DeFi application has been audited before using it. In addition, consumers should consider more issues before interacting with the protocol or purchasing their governance tokens.
In the DeFi field, the triple-digit APY (percentage of annual output) is no exception due to the possibility of yield agriculture. However, the golden rule of investment is that the return must match the risk. Above-average APYs are common, but they seem too good to be true and require further investigation.
A more in-depth investigation requires first investigating the team that built the DeFi protocol. Before the agreement became a DAO, a centralized team worked on the smart contract of the agreement. However, it is not uncommon for anonymous teams to work on projects. Therefore, the best way to predict whether a team is trustworthy is to look at the transparency of what they do with the agreement.
Finally, it is crucial to determine whether the project’s community is authentic. Projects that motivate the deployment of social media bots are no longer a new strategy. On the contrary, a participating community that publicly debates governance proposals, user experience, future solutions, and other related topics cannot be faked.
In order to assess the risks in decentralized network lending protocols, open source programs such as DeFi scores have been established. This can help consumers understand how to access the dangers in such agreements.
in conclusion
According to an article in Elsevier’s Journal of Business Ventureing Insight 2020, “Blockchain technology may greatly expand the scope and productivity of node-to-node exchanges, and transform traditionally infeasible strategic directions into viable strategic directions. Benefits With blockchain technology, financial services can become more innovative, interoperable, decentralized, borderless and transparent.”
Therefore, the decentralized financial platform provides an alternative to traditional banking and financial systems, not just a plug-in. These platforms are designed to eventually become platforms independent of their creators and investors, managed by a group of users who own the protocol tokens.
If you plan to switch to the DeFi platform, you can find a suitable solution platform and seek professional help.If you want to be an expert in this field, you can find Blockchain authentication Course or Cryptocurrency Course Online.Provided by multiple institutions DeFi training And DeFi certification courses.
In addition, you may be looking for companies that provide DeFi development solutions. However, make sure to conduct appropriate research and choose the one that suits your goals and criteria.
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