Decentralized finance is a rather new concept, but it has been around for some time now, and the world is already seeing multiple applications drawing insight and processing power from blockchain technology and people out there providing decentralized financial services to the users. Decentralized finance makes access to money easier for the common people.
Some of these are the very people who have been ridiculed and cast aside by those major banks and sophisticated financial enterprises because somehow they don’t deem them fit to have consistent and seamless access to their finances. Either their credit score is not enough, they don’t have a job, or some other allegation from their rap sheet is thrown at them for not having access to basic financial services.
DeFi is a New Concept
These centralized services in terms of finance are provided by decentralized organizations that have no occurrence or valid existence on paper and a collection of multiple user nodes connected with the help of the Internet that are running the circus. Anyone with access to the Internet can get the advantage of these services from anywhere in the world, and they would get instant access to their funds without anything being hidden from them in terms of added taxes and incurred costs that those big banks and financial enterprises are not willing to let go of.
Rigidness and Accuracy of Decentralized Finance
There is a huge array of people out there that are unbanked, which means that they don’t have access to the most basic financial services, and the concept of decentralized finance is going to revolutionize the whole thing by providing them access to these services in a rather convenient and hassle-free way. The whole decentralized finance ecosystem is developed on public distributed networks and contracts that are self-executing, which means that there is no need for an intermediary to solve the issue of a transaction occurring between two parties, and there is absolutely no need for any of the involved parties to trust each other either.
The payment won’t be transacted if the deeds of the agreement are not fulfilled by any of the involved parties; that is why everyone has to play by the book to be able to get paid or avail of the services that they have ordered. The concept of smart contracts on these decentralized instances is still a new one, but people and financial enterprises out there are already making a fine use out of it. A smart contract primarily is an agreement that is drawn up between two parties that involves a long list of demands that are mutually agreed upon and can’t be changed once the ink has dried on them, it means that when the smart contract is up and taken up by a blockchain entity, it can’t be changed or tampered with at all.
Use of DeFi Protocols
For a decentralized finance protocol or an enterprise to work, it needs to be built on a dedicated blockchain such as Ether or Binance smart chain and must have proper processing power; otherwise, the whole concept of speed and agility is lost. With the availability of blockchain technology becoming more advanced and prominent, the support for these smart contracts is definitely growing; before developing a decentralized financial system, it is important to first choose a network.
There are a bunch of networks present out there working in close collaboration with decentralized finance, and the users won’t have any problems switching between these as only a few parameters need to be changed to be able to do that. Users are then able to access their funds directly from the comfort of their homes or just about wherever they are using the wallet extensions to connect with these networks. A private key is required by the user to be able to get access to their funds, and it makes the whole concept of security more precise and intact rather than using password-protected technology, which is old and perceptible to hacking more easily.
The mobile applications for decentralized finance projects are also widely available, which means that if a user can’t reach their browser on their desktop, then they can reach their funds through their mobile phone. A private key can be used to migrate user wallets from one device to another. Making things easier for users, these mobile applications are often declared open source, which means that users can make changes to their UI or the experience of the app according to their own desires.
The technology is so abrupt, and out front that even by scanning a QR code and putting in the private key of the user, they will get instant access to their funds, it also secures the whole charade as this way only a specific user to which the wallet belongs would be able to get access thus blocking every attempt of hacking or ill entry within the system. It also takes away the possibility of scams and or getting robbed by cybercriminals on the Internet. Just to be on the safe side of things, you want to join a decentralized finance project that has already been audited, it means that it has been tested in real-time by some of the most authenticated and precise technologies out there and that they have indeed termed the project as safe or secure.
All the decentralized finance applications out there are built on the top of the networks, and each and every network has its own unique token, which is easily identifiable through the ticker symbol they have on various exchanges. Ether, Bitcoin, Ripple, and every other cryptocurrency out there has its own ticker symbol.
All of these tokens are used by the users for a variety of purposes; these can be used to perform transactions on the blockchains and used to buy products and services of the Internet or directly from vendors who support these tokens and are compatible with them. There is no need for you to dive right into decentralized finance if the only motive you have is to buy these tokens; you can do that without putting your hands into the decentralized finance jar.
After you have made the purchase for these tokens, you need to move these from the exchange that you have bought them on into a secure wallet using decentralized finance and distributed technology to have every ounce of control over it. It is important to make sure that you are going to move these funds into a correct network system because if the funds or assets are not compatible with the network, then you are going to have a lot of trouble at your hands.
There are some exceptions out there, there are some exchanges that allow users to withdraw Bitcoin token to an Ether address and Ether to Bitcoin, but after doing so, you would ultimately have to move that token into a network-compatible wallet. Every transaction that takes place on decentralized finance protocol first needs to be authenticated and approved in a manual aspect, and this incurs a potential fee. Working with DeFi it is important to have a bundle of choices regarding these enterprises and always have options regarding the speed of the transaction and the transaction fee that the whole process is going to incur.
What are DeFi Services?
When you have done the basics that are selecting a dedicated application for use and setting up a wallet system, it is finally time for you to start using decentralized finance services. There are two things that you can do here, you can either trade using a decentralized exchange, and there are fees for that which you would have to pay overtime, or you can lend your assets to other users in markets using a lending protocol and earn a passive income. If you wait to consider the number of possibilities with decentralized finance, then surely you would have hundreds of them on your hand.
Many people complain about the complexity of connecting their wallets with a dedicated decentralized finance protocol they will be using. The process is, however, extremely simple and convenient even, as all they have to do is head over to the website of these protocols and then connect your wallet using the private key which you developed once you signed up for the service. You can find a connect button present either on the upper corner of the site or after doing some digging; you would definitely be able to find the correct procedure for that, it is not that difficult, and once you get the hang of it, you will be sailing through it like a regular sailor.
Connecting your wallet with the decentralized finance protocol is like logging into your account, which in this case, is going to be your wallet address. Before you can make any trade in these tokens or line them on a dedicated decentralized finance protocol, you would have to enable these tokens individually so that the protocol is able to access them on your wallet even this connection incurs a small fee which you have to pay every time you are taking action over these protocols and decentralized finance services.
Make Your Crypto Work for You in a DeFi Environment
There is something that you need to understand about the crypto environment and to do business with these decentralized finance services; it is a game that means that you might win at the end of the day, or you might end up losing a lot. You need to play it by being smarter and never losing touch with logic now that is the most important thing.
Yes, there are multiple strategies out there that are complex, complicated, and can yield big if done right but know that a single bug in one dedicated protocol environment could lead to losses in another protocol. The whole environment is extremely composable and interconnected beyond imagination. The most significant advantage of using decentralized finance is that there are no trusted third parties, and you don’t have to rely on them; there is no need for an intermediary, which is the single most elegant thing about decentralization.
But that doesn’t mean that the code written in smart contracts is going to be completely protected from the eyes of the people or other users of the decentralized finance protocols. Anyone is able to review the code that is written in these contracts by using decentralized finance protocols because some of these protocols are directly run and orchestrated by decentralized autonomous organizations. There are certain services that the decentralized finance ecosystem offers, and as a new potential user, you need to understand them a little bit better.
In a decentralized finance protocol, you can both lend and borrow your cryptocurrencies without the need for an intermediary, as has been explained a lot already. The rate of interest is calibrated according to the supply and demand condition and, for that matter, is going to change over time. In some of the protocols, borrowers have to provide enough collateral on the loans that they are taking from the lenders so that the lenders would be able to get paid even when the market is in serious turmoil.
This has helped many people to take out small loans in the time of their need and get enough exposure to their cryptocurrencies as they don’t have to lose them or sell them away for the sake of covering a dedicated period of their need. Once they have the money present in the form of a dedicated asset to give back to the lender, a request would get initiated, and the lender would get the money that they initially lent to the borrower plus interest.
But if the value of the token which was collateralized by the borrower drops, then the protocol itself would liquidate the coins so that the sum could be paid back to the lender. And if the price of the token goes up, then the protocol would pay the lender and let the surplus mount remain intact so that the user doesn’t lose their exposure.
Yield Farming and Liquidity Mining
If you have had a taste of stocks and the forex market before then, you already know the process, how the trades are made and how inconvenient it could be to make yours when the market is in full swing. As a result, many traders lose those important moments of putting in their money on a dedicated asset, and it is not a welcoming sight. But decentralized exchanges that work on decentralized finance protocols are some of the leading marketplaces in the whole globe that discard completely the centralized way of registering a trade and use automated market makers to execute the trades on the blockchain through smart contracts.
There is no queue of any kind, and you don’t have to get your broker on the phone because there is no need for one. Have your money aligned, go to a dedicated website for dedicated crypto exchange, and put your money on whatever asset you deem fit; it is as simple as that. The automated market maker model which crypto exchanges use is replacing traditional order books with pre-funded liquidity pools that have multiple assets up and available in a dedicated trading pair. The liquidity in these specific pools is orchestrated by the users who are given the green light to earn fees from the trades which would get executed on a specific pair.
The whole process is known as liquidity mining, and these users are earning a generous passive income by simply providing liquidity to these pools. Think of a pool as an environment in which multiple trades could be made simultaneously, or even single trades can also be made. It doesn’t matter if it ends up being a loss or a profit; these liquidity miners earn a fee nonetheless.
There are certain elements that need to be considered when going into business with liquidity mining as it might lead to impermanent losses, but lending, on the other hand, is far more promising and significant than liquidity mining. If a pair is being traded and one of the asset moves its face value, then the liquidity providers would have to add in more liquidity, or otherwise, they would have less of the asset whose value went up, thus the whole thing ending in impermanent loss.
Staying Safe while Dealing with DeFi Protocols
There is no doubt that the decentralized finance sector is bringing forward a lot of innovation as initial coin offerings (ICOs) have brought in the past. But it doesn’t mean that the space itself is completely secure; there are always scenarios in which malicious actors could get involved and take advantage of the users by manipulating them into schemes that promise huge earnings but come out as a scam in the end.
That is why it is extremely important that the decentralized finance sector that you want to go into business with is properly audited before you can sign up for it. You must be asking a lot of questions before going into the business with a specific protocol or buying its tokens.
People have done obscure things to get their business up and running as for multiple projects in the centralized financial sector, people have deployed bots on social media to build up huge hype about their dedicated projects, but at the end of the day, all of these were indeed fake and ended up as a scam. Do your research properly, have all the information regarding the audit of a specific decentralized finance protocol before you go in business with it, and do check out the community that is built around that protocol because there you would actually get some deeper insight from the people who are already in business with it.