Decentralized Finance (DeFi) is becoming increasingly important for the financial services system within the blockchain network, but it should not be confused with cryptocurrency. Learn what DeFi is and how it functions.

What is DeFi?

Decentralized Finance – or simply “DeFi” – refers to a system of financial services based on blockchain technology that operates without the need for transaction approvals from government authorities. In simple terms, DeFi is a type of financial institution or banking system on the blockchain that allows you to trade digital assets or cryptocurrencies without incurring transaction costs associated with services from institutions like central banks.

DeFi also refers to a free, open-source digital marketplace that provides users with programming skills the opportunity to innovate and develop their own decentralized applications (dApps). DeFi platforms include payment services, trading and investments, loans, insurance, and asset management. However, while DeFi may seem attractive and beneficial for users, it also comes with risks.

How Does DeFi Work?

DeFi utilizes a technology-driven blockchain ecosystem to bypass traditional systems and processes for managing financial services—essentially eliminating the middleman. This is achieved through the use of digital wallets, smart contracts, and oracles.

As a decentralized system, Decentralized Finance (DeFi) relies on a financial infrastructure that operates across multiple computer networks—a public ledger where digital copies of transactions are stored. It employs cryptocurrencies and smart contracts built on the Ethereum network, the second-largest crypto marketplace after Bitcoin.

The DeFi concept turns the traditional system upside down and is now being adapted for mortgages, loans, and other banking products. The essential vehicles of these emerging fintech areas are decentralized applications (dApps), which consist of hardware, software, and stablecoins. They enable users to borrow, lend, and trade cryptocurrencies without requiring approval from central banks or other governmental authorities.

In the wake of the DeFi boom, the US company Coinbase has adapted this concept and established a decentralized crypto exchange known as the Global Digital Asset Exchange (GDAX).

What Are the Benefits and Risks of DeFi?

Using DeFi comes with a range of risks and benefits, which we will outline below.

Benefits of DeFi

• Real-Time Transactions: Users conduct transactions in real time, ensuring greater transparency. DeFi updates interest rates several times per minute.
• Greater Transparency: The network publicly lists transaction activities, allowing other users to verify them.
• Cost Savings: Users save on transaction fees and other costs associated with traditional financial service providers.
• Faster Rate Information: Interest rates are provided more quickly compared to traditional financial institutions like banks, which publish this information monthly.
• Peer Smart Contracts: Two parties store smart contracts in a public database on the blockchain, finalizing them only when they meet the agreed-upon conditions of the digital contract.
• Automated Contract Enforcement: Programmed smart contracts ensure the automatic execution of contract terms. For example, a contract can automatically release collateral once the parties fulfill the conditions.
• Custom Application Development: Since Decentralized Finance (DeFi) is open-source, users can program their own applications without needing special permissions to view or modify the source code.

Risks of DeFi

• Fear of Loss: There is a concern that funds within the system could be lost or stolen.
• Hacking Threats: Cyberattacks pose a serious risk, as skilled hackers can exploit vulnerabilities and breach the system.
• Programming Errors: Bugs in the blockchain’s programming can lead to system malfunctions.
• Security Codes: Unique codes, known as private keys, are required to secure your account. If these are lost, you may lose access to your funds.
• Value Depreciation: A decline in the value of crypto assets used as collateral can lead to the liquidation of a position.

DeFi and Crypto: What Is the Difference?

While cryptocurrencies are decentralized, they are not the same as DeFi. There are several differences between DeFi and cryptocurrencies. Cryptos like Bitcoin store their value on their own blockchains. In contrast, Decentralized Finance creates a virtual marketplace that offers various cryptocurrencies from the Ethereum network.

Within the DeFi system, users who hold cryptocurrencies can lend their digital coins and earn interest. Alternatively, they can take out loans against the cryptos they hold in their digital wallets.

How Does the DeFi Coin Work?

It is possible to invest in a DeFi cryptocurrency: the DeFi Coin (DEFC). The DeFi Coin is the digital token that represents the website DeFiCoins.io and DeFi Swap. Through this exchange, buyers and sellers can conduct trades directly with other market participants—without a central third party. This is made possible by the protocol’s digital token, the DEFC.

Traders can exchange various cryptocurrencies and tokens on the Decentralized Finance exchange, including Uniswap, Chainlink, and many others. Users can exchange the DEFC through digital wallets on the Binance Smart Chain.

Aspects Promoted by the DeFi Coin

• Static Reward System: Users can earn dividends through a static reward system. To discourage day trading with DEFC tokens, the protocol includes a transaction fee of 10%. This encourages users to hold the token long-term, with the reward system functioning similarly to traditional dividend payments.
• Addressing Liquidity Issues: The protocol allows users to earn a fixed interest by contributing their digital currency to liquidity pools using smart contract technology. Unlike traditional cryptocurrency exchanges or brokers that utilize centralized order books, the automated DEFC liquidity pools do not require another participant on the other side of the transaction.
• A “burning strategy” is implemented. The “burning” of a cryptocurrency token functions similarly to a stock buyback program. This measure reduces the total supply of tokens and increases their market value.

The protocol is still relatively new. However, a relevant whitepaper indicates that a number of additional features will be integrated into the system in the future, resembling those of traditional centralized financial systems.

How to Trade DeFi

1. Learn How the Crypto Market Works: Familiarize yourself with the mechanics of the cryptocurrency market.
2. Open a Trading Account: You can start with a live account or practice with a demo account.
3. Select Your Opportunity: Identify the trading opportunities that interest you.
4. Determine Your Position Size: Set the size of your position and limit your risk.
5. Place Your Trade: Execute your trade.

With us, you can trade eleven major cryptocurrencies, two cryptocurrency pairs, and one crypto index. The index reflects the prices of the ten largest cryptocurrencies, weighted by their market capitalization.

Opening a Turbo24 or CFD trading account with us is entirely digital. You can trade cryptocurrencies on the spot market, through futures, or using barriers and vanilla options.

You have the following cryptocurrencies to choose from:

• Bitcoin
• Ether
• Bitcoin Cash
• Litecoin
• EOS
• Stellar
• Bitcoin Cash/Bitcoin
• Ether/Bitcoin
• Krypto 10-Index
• Cardano
• Chainlink
• Polkadot
• Dogecoin
• Uniswap

When trading with turbos and CFDs, you open your position with a margin—an initial capital investment that represents only a fraction of your total market exposure.

Both turbos and CFDs are leveraged derivatives. This means you can trade price movements of cryptocurrencies without owning the underlying coins.

When trading with leverage, you must first make an initial capital investment—known as the margin—to open a position in your chosen cryptocurrency. You can then increase your exposure. Leverage can multiply your gains, but it can also amplify your losses. Therefore, you should manage your risk carefully.

Once you submit your application to open a trading account, we will review your information. If your application is accepted, you can deposit funds and start trading. And don’t worry: you don’t have to deposit anything into your account until you are ready to trade. You can also withdraw money from your account at any time if you wish.

Overview of DeFi

Decentralized Finance is a blockchain-based financial service system that bypasses government authorities and the associated costs faced by traditional banking and investment firms.

Cryptocurrencies and DeFi are not the same: most crypto assets are tied to their own blockchain, while DeFi is a crypto marketplace where various cryptocurrencies and altcoins can be traded.

Decentralized Finance is open-source, meaning users can view the code, make modifications, and develop their own DeFi applications.

DeFi processes transactions in real time, ensuring greater transparency as users can see every activity recorded in a public ledger.

When trading cryptocurrencies, you can use leverage to open your position at a fraction of the market value.

In future articles, we will explore DeFi in more depth with Lenous Protocol and examine “The Future of DeFi: Trends and Opportunities for 2024″ and “Decentralized Finance (DeFi): In-Depth Analysis.”