What is DEFI? Decentralized Finance Explained (Ethereum, MakerDao, Compound, Uniswap, Kyber)

Have you ever heard about defi before? Are defi apps the ultimate killer apps in the crypto space or just new hype? No matter if you never heard about defi before or you want to make sure you understand it right this article is for you.

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Quick History of DeFi

One of the first projects that started the decentralized finance movement was MakerDAO.

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Lending and Borrowing

Besides MakerDAO that we just mentioned there are a few other important defi projects in this category.

Algorithmic Stable Coin

With clever use of smart contracts and certain incentives we can create a stable coin that is pegged to the US Dollar without having to store dollars in the real world. We already mentioned MakerDAO that essentially allows the users to lock in their collateral and generate DAI. DAI is a good example of an algorithmic stable coin.

Decentralized Exchanges

Decentralized exchanges or dexes, in opposite to standard, centralized crypto exchanges, allow for exchanging crypto assets in a completely decentralized and permissionless way without giving up the custody of the coins. There are 2 main types of dexes the liquidity pool based and the order book based ones.

Derivatives

Similarly to traditional finance, derivatives are contracts that derive their value from the performance of an underlying asset.

Margin Trading

Margin trading also similarily to traditional finance is the practice of using borrowed funds to increase a position in a certain asset.

Insurance

Insurance is yet another part of traditional finance that can be reproduced in decentralized finance. It provides certain guarantees of compensation in return for a payment of a premium. One of the most popular applications of insurance in the defi space is protection against smart contract failures or protection of deposits.

Oracles

Another really important although not strictly limited to finance part of the defi ecosystem are oracle services that focus on delivering reliable data feeds from the outside world into the smart contracts. The most popular project in this space is Chainlink.

DeFi vs CeFI

Let’s compare the main differences between defi and cefi that stand for centralized or traditional finance.

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What are the risks?

Before we wrap up this article we have to also mention the potential risks associated with defi.

Summary and the future of DeFi

As you probably already noticed, defi is a super interesting and vibrant space that is full of opportunities. Although, we have to remember that is is still a very nascent industry, so it’s a high risk and a high reward game.

Extra

This was only an introduction to defi. In the following articles we’ll be focusing on each part of the defi ecosystem separately, so stay tuned.

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DeFi education

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