Decentralized Finance is a term often mentioned in the cryptocurrency field. So what exactly is DeFi, why does DeFi receive so much support from the crypto community, and what are the advantages and disadvantages of Decentralized Finance, let’s analyze them in detail right here.
Contents
- 1 What is DeFi (Decentralized Finance)?
- 1.1 What is the concept/definition of DeFi?
- 1.2 Comparison between Decentralized Finance and traditional finance
- 1.3 What are the advantages and disadvantages of Decentralized Finance?
- 1.4 What are the components of DeFi?
- 1.5 The most popular DeFi applications currently
- 1.6 Frequently Asked Questions About Decentralized Finance
What is DeFi (Decentralized Finance)?
What is the concept/definition of DeFi?
DeFi applications aim to recreate traditional financial systems, such as banks and cryptocurrency exchanges. Most current DeFi applications run on the Ethereum blockchain platform.
Let’s look back at the current centralized financial system (CeFi – Centralized Finance) including forms like banks, exchanges (stocks, forex, gold, commodities), insurance companies, electronic wallets (momo, paypal, alipay, grabpay…). With centralized finance, when you put your money in and want to make a transaction, withdraw money, you need the approval of the centralized financial institutions.
For example, when you buy stocks, it takes 3 days for the stocks to arrive in your account while the exchange has already deducted the money. When you sell stocks, you also have to wait 2 days for the sale money to arrive, and if you want to withdraw early, you need to pay a fee for an advance on the sale.
Or if you are in Vietnam and you want to open an account at a bank in China or Thailand, what should you do? Probably fly there and go through cumbersome procedures to be able to open one.
With decentralized finance, no one can hold your money, you can put money in and withdraw whenever you want, wherever you are. If you deposit money in the bank and want to withdraw, you need to do it during business hours or use the 24/7 service with high transaction fees and there are limitations on the amount of money you can withdraw in one day.
Comparison between Decentralized Finance and traditional finance
Decentralized Finance (DeFi) | Centralized Finance (CeFi) |
You hold your money | Your money is held by financial institutions |
You control where your money goes and how it is spent. | You have to trust financial institutions, which may invest or lend your money with risks you are unaware of. |
Money transfers take place in a few seconds or minutes | Payments can take hours or even days due to manual processes. |
Transactions are pseudonymous (identity is kept private) | Financial activities are closely tied to your identity. |
DeFi is open to anyone, anywhere | You need to register to use financial services, usually within a specific territory. |
The market is always open, with 24/7 trading activity | Markets close because employees need rest. |
DeFi is built on transparency - anyone can view product data and check how the system operates. | Financial institutions are closed books: you cannot request to see their loan history, records of managed assets, etc. |
Not protected by the law | Protected by the law |
What are the advantages and disadvantages of Decentralized Finance?
What are the components of DeFi?
All components of the decentralized financial system belong to a software. The components of each layer aim to perform a specific function in building the DeFi system. The ability to combine is a defining characteristic of the stack as the components of each layer can be structured together to form a DeFi application.
There are 4 main component layers of DeFi applications:
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Settlement Layer: is the foundational layer that other Decentralized Finance applications are built upon, including a public blockchain and the native token of that blockchain. A typical example is the Ethereum Blockchain with the ETH token.
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Protocol Layer: is the protocol layer consisting of standards and rules written to manage specific tasks or operations. It is a set of principles and rules that all participants have agreed upon. An example of a DeFi protocol is Synthetix, a derivatives trading protocol on Ethereum.
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Application Layer: is the application layer, abstracting the basic protocols into simple user-oriented services. Most of the popular applications in the cryptocurrency ecosystem, such as decentralized cryptocurrency exchanges and lending services, are on this layer.
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Aggregation Layer: Is the aggregation layer that includes aggregators connecting different applications from the previous layer to provide services to investors. For example, they can allow seamless money transfers between different financial tools to maximize profits. With traditional methods, such transactions would require coordination and significant paperwork. But a technology-based framework smooths the investment rails, allowing traders to switch between different services quickly. Lending and borrowing are an example of a service that exists on the aggregation layer. Banking services and electronic wallets are other examples.
The most popular DeFi applications currently
Decentralized Finance applications are created with functions such as:
- Quick global money transfers: you can send cryptocurrency to anyone anywhere quickly
- Borrowing from decentralized providers: borrowers borrow directly from a specific lender or loan pool, where the lender provides money (liquidity) for the pool that the borrower can borrow from.
- Saving by lending cryptocurrency: You can earn interest on your cryptocurrency by lending and watch your money grow in real-time.
- Lossless lottery applications: you buy lottery tickets with your cryptocurrency through the Decentralized Finance lottery app, suppose it’s 100 tickets, if you win, you get more money, if not, you move on to the next round. You can withdraw money anytime you want while the app uses your lottery money to lend and earn interest.
- Decentralized insurance: Decentralized insurance aims to make insurance cheaper, faster in payment, and more transparent.
- Decentralized Stablecoin: these Stablecoins will maintain a stable price similar to real-world money, for example, USD has corresponding stablecoins like USDT, BUSD, etc.
There are countless Decentralized Finance applications created by various ecosystems, most notably ecosystems like:
DeFi Applications on Ethereum
- DeFi Lending & Borrowing Applications: Aave, Compound, Oasis
- DeFi Token Swap Applications: Uniswap, Matcha, 1inch
- DeFi Applications for Trading and Prediction: Polymarket, Augur, Loopring, dYdX
- DeFi Applications for Investments: Token Sets, PoolTogether, Index Coop
- DeFi Payment Applications: Tornado cash, Sablier
- DeFi Insurance Applications: Nexus Mutual, Etherisc
- DeFi Portfolio Management Applications: Zapper, Zerion, Rotki
- DeFi Community Funding Applications: Gitcoin Grants
DeFi Applications on Near
The most notable DeFi projects on the Near blockchain platform include:
- Skyward Finance: raising capital and providing users opportunities to earn profits
- Ref Finance: decentralized exchange (DEX), lending protocols, synthetic asset issuance companies…
- Rainbow Bridge: a bridge between NEAR and Ethereum, facilitating asset exchanges between NEAR and Ethereum
- OIN Finance: decentralized stablecoin issuance platform
DeFi Applications on Solana
The most prominent Decentralized Finance applications from the Solana ecosystem include:
- Serum – the DEX: a decentralized exchange (DEX), allowing users to trade between different blockchains.
- Raydium: also a decentralized exchange
- Oxygen: lending and borrowing application
- Saber: a decentralized exchange dedicated to stablecoins
=> Learn more What is Solana?
DeFi Projects on Polkadot
There are numerous DApps (DeFi applications) created on the Polkadot ecosystem, notable ones include: PolkaBTC, Kusama, Moonbeam, Polkastarter, Polkaswap, Bridge Mutual, RioChain, Acala, Banksy Finance…
DeFi Projects on Cardano
The list of decentralized finance projects on Cardano includes: DOEX, Cardax, SundaeSwap, Liqwid, ADAX, ErgoDEX, MELD, Indigo Protocol, Card Wallet….
=> Learn more What is Cardano?
DeFi Projects on Avalanche
Notable Decentralized Finance projects on Avalanche include: BenQi, Trader Joe, Pangolin, YieldYak, Snowball…”
=> Learn more What is Avalanche (AVAX)?
Frequently Asked Questions About Decentralized Finance
This is the activity of locking cryptocurrency assets in a smart contract in exchange for becoming a validator in the DeFi protocol or layer 1 blockchain and earning rewards for performing requested tasks.
There are countless coins created from Decentralized Finance applications, so it’s impossible to list them all. You can refer to the list of examples from the DeFi images of the Ethereum, Solana, Polkadot ecosystems above or visit the coinmarketcap website to filter out DeFi tokens.
DeFi is actually not a scam as it was created with the purpose of replacing the current centralized financial system. However, its risk is quite high as it is not yet legally protected. Participation is voluntary.
– DeFi is decentralized finance, commonly used in the cryptocurrency market with the aim of replacing the traditional centralized financial system.
– DeFi has advantages such as: accuracy, transparency, fast transaction processing speed, low fees, and 24/7 operation.
– The disadvantages of Decentralized Finance are also significant such as not being legally protected so high risk, low liquidity, being exploited for illegal transactions, and no one being responsible for the risks that investors face.
– Decentralized Finance is not a scam, but if you want to participate, you need to understand it and accept the benefits and risks it brings.
– Decentralized Finance is currently one of the main concerns of investors.
Through this, hopefully, you have understood what DeFi is, the advantages and disadvantages of Decentralized Finance, as well as its applications. If you have any questions related to Decentralized Finance or other related terms, feel free to leave a comment to get an answer as soon as possible.”
