What is DeFi?

I am sure everyone has came across this term DeFi before and if you haven’t here is a first.

Decentralised Finance, or DeFi for short, is a term used to describe a financial system that operates on a decentralised peer-to-peer network. It uses blockchain technology to create financial products and services that are not controlled by a central authority, such as a bank or government.

Instead, these products and services are built on top of a blockchain network and are available to anyone with an internet connection.

DeFi is like a piggy bank, but instead of keeping your money in one place, it's spread out all over the internet. You can use this money to buy things, lend it to people, or even make more money with it. Because it's spread out all over the internet, no one person or group can control it all.

How does it work?

DeFi works by leveraging blockchain technology to create financial applications that operate without traditional intermediaries like banks or other financial institutions.

These decentralised applications, or dApps, rely on smart contracts, which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into code.

By using smart contracts, DeFi applications are able to automate financial transactions and remove the need for intermediaries to facilitate them.

Instead of having someone like a bank or a money jar to keep track of the money, the piggy bank uses a magic contract that tells it what to do. This way, everyone can trust that the piggy bank will always follow the rules and keep everyone's money safe!

Benefits & Risks

Now when it comes to decentralisation there are always risks and benefits involved (just like all things in life).

Benefits of DeFi:

1. Decentralised: DeFi eliminates the need for intermediaries such as banks, making it a decentralised system.

2. Accessibility: Anyone with an internet connection can access DeFi platforms, without the need for a traditional bank account or credit history.

3. Transparency: DeFi transactions are transparent and recorded on a public blockchain, ensuring greater transparency and accountability.

4. Security: DeFi platforms are built on secure blockchain technology, making them more resistant to hacking and fraud.

5. Low Fees: DeFi platforms often charge lower fees than traditional financial institutions, making them a more cost-effective option.

Risks of using DeFi:

1. High Volatility: The value of cryptocurrencies can be highly volatile, and this can impact the value of DeFi assets.

2. Smart Contract Risk: Smart contracts used in DeFi are still in their infancy, and there is a risk that they may contain bugs or other issues that could lead to financial losses.

3. Liquidity Risk: The liquidity of DeFi assets can be low, which can make it difficult to buy or sell them quickly.

4. Regulatory Risk: DeFi is a relatively new technology, and there is a risk that regulators may introduce new rules or regulations that could impact the industry.

5. No Insurance: Unlike traditional financial institutions, DeFi platforms are not insured, and there is no recourse if you lose your funds.

How do you stay safe?

Here are some commandments that I will be giving you to stay safe in DeFi.

1. Do Your Own Research (DYOR): Before investing in any DeFi project, take time to research and understand the project's goals, the team behind it, and its technology. Make sure it is legitimate and has a good reputation within the community.

2. Use Reputable Platforms: Only use reputable DeFi platforms that have a proven track record and are known to have good security practices. Check for things like two-factor authentication, auditing, and insurance coverage.

3. Keep Your Private Keys Safe: DeFi relies on a user's private key to access their funds, so it's important to keep it safe. NEVER SHARE your private key with anyone, and use a hardware wallet if possible to store it offline.

4. Use Strong Passwords: Always use a strong, unique password for your DeFi accounts, and avoid using the same password across multiple accounts. Consider using a password manager to generate and store strong passwords.

5. Be Wary of Scams: DeFi has become a popular target for scammers, so be wary of any unsolicited offers or messages. Never give out your private key or seed phrase to anyone, and avoid clicking on links or downloading attachments from unknown sources.

6. Stay Up-to-Date: Stay up-to-date with the latest news and developments in the DeFi space. This can help you identify potential risks or opportunities, and make informed decisions about your investments. Best way is through Twitter.

7. Invest Responsibly: Invest only what you can afford to lose and always keep a diversified portfolio. DeFi can be highly volatile, so it's important to have a long-term investment strategy and not to invest more than you can afford to lose.

Popular Projects in DeFi

Probably after reading this you are either feeling eager to jump into this industry or to stay away from it. For the eager people, I will be giving you some popular DeFi protocols that many people use at the moment.

Lido

Lido is a decentralised staking protocol that allows users to earn rewards on their Ethereum holdings without the need to operate a node themselves.

Users can stake their $ETH tokens with Lido, which then pools the tokens with other users' stakes and operates the node on their behalf.

In return, users receive a representation of their staked ETH in the form of a token called stETH, which they can use for other purposes such as trading, lending, or borrowing. Lido also provides a secure and transparent way to stake ETH on the Ethereum network and helps to reduce the barriers to entry for users who may not have the technical expertise or resources to stake on their own.

Project Link

Maker DAO

MakerDAO is a decentralised autonomous organization (DAO) built on the Ethereum blockchain that enables users to create and manage the DAI stablecoin, which is pegged to the value of the US dollar.

The system works by allowing users to deposit Ethereum as collateral in a smart contract, which in turn issues DAI tokens that can be used for transactions and loans. MakerDAO also has its own governance token, MKR, which is used to vote on proposals and decisions within the DAO.

The goal of MakerDAO is to provide a stable, decentralised alternative to traditional finance, with the DAI stablecoin serving as a key component of the ecosystem.

Project Link

AAVE

AAVE is a decentralised finance (DeFi) platform that allows users to lend and borrow cryptocurrencies without the need for intermediaries such as banks. AAVE uses smart contracts to automate lending and borrowing transactions, which are executed on the Ethereum blockchain.

Users can deposit their crypto assets into the AAVE protocol and earn interest on their holdings or borrow other cryptocurrencies using their deposited assets as collateral. AAVE also allows users to trade between different cryptocurrencies and earn rewards for participating in governance decisions through a native token called AAVE.

Project Link

Curve Finance

Curve Finance is a decentralised exchange (DEX) that is designed to provide low slippage swaps for stablecoins and other similar assets. It was launched in 2020 and operates on the Ethereum blockchain.

The platform uses an automated market maker (AMM) algorithm to facilitate trades, which allows users to swap one asset for another without needing to match with a buyer or seller.

Curve Finance has gained popularity for its ability to provide efficient and cost-effective trading of stablecoins and other similar assets. It also features a liquidity mining program that incentivises users to provide liquidity to the platform.

Project Link

Uniswap

Uniswap is a decentralised exchange (DEX) that operates on the Ethereum blockchain. It allows users to trade cryptocurrencies without the need for a centralised intermediary, such as a traditional exchange.

Uniswap utilises an automated market-making (AMM) system, which means that trades are executed by smart contracts rather than a centralised order book. Users can easily trade any ERC-20 token and even provide liquidity to the platform and earn a portion of the trading fees.

Uniswap has become one of the most popular DEXs in the DeFi space, with a simple and user-friendly interface that has attracted many users.

Project Link

Disclaimer: This is not any kind of financial advise. This newsletter is solely informational; it does not constitute investment advice, a solicitation to buy or sell any securities, or a recommendation regarding how to manage your money. Be cautious and conduct your own study, please.