Learn everything you need to know to start your journey in the world of decentralized finance
What is DeFi? An alternative to traditional finance, Decentralized Finance is an emerging blockchain based field, based on the central idea of providing financial services without the presence of third party or intermediaries. Instead, the self-executing complex logic smart contracts are used, which operate without any intervention. It’s an attempt to go “bankless” – meaning developing the ability and means to override the current financial institutions and banks for a more free inclusive and less restricted system.
The characteristics of DeFi protocols are trustlessness, resistance to censorship, decentralization, ability to verify on-chain, low barriers of entry, decentralization, unhindered transaction execution and interconnectivity- the so called lego-like composability. Unlike traditional finance, DeFi is accessible to anyone with an internet connection and a basic computer or smartphone.
They provide the ability to swap and trade assets in a decentralized manner, without taking custody of funds and without any insolvency risk. Since they operate without an intermediary organization for clearing transactions, they rely instead on self-executing smart contracts to facilitate trading and liquidity pools (LPs) from where liquidity providers can earn value accrued by fees in the form of protocol tokens. Notable examples include Curve, Uniswap and SushiSwap.
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A derivative is a contract whose value is derived from another underlying asset such as crypto-assets, stocks, commodities, currencies, indexes, bonds etc. Decentralized derivatives cut the middleman while putting the equivalent of financial derivatives such as options, synthetic stocks, futures and more.
Notable examples:
dYdX, a decentralized non-custodial crypto exchange which allows users to trade without any middleman by using smart contracts in the Ethereum change.
Opyn, one of the most popular decentralized options platforms, originally built to provide hedging and insurance solutions to the defi exosystem.
Perp, an Ethereum based exchange for perpetual contracts allowing you to go LONG or SHORT on various assets through smart contract defined perpetual contracts via a virtual AMM (Automated Market Maker).
Mirror Protocol, a porotocol that allows the creation of synthetic assets that mirror real world securities.
Yield Optimizers are a set of decentrilized finance protocols that allow users to optimize their earnings on crypto assets through lending and trading services.. They do this through a series of vaults which are a collection of investment strategies designed to generate the highest returns from other DeFi projects/ Liquidity Pools. This allows them to have a tax efficient yield farming strategy while maximizing the optimal returns on a given asset by compounding gains through smart contracts.
Popular Yield Optimizers include YFI, CVX, BIFI, AUTO, TOKE, TULIP.
These enable rapid and trustless transfer of value between two parties, to facilitate trade and commerce. Fully decentralized solutions that offer customers a simple and user-friendly way to make payments.
Popular payment protocols in DeFi include xDAI, Sablier. zkSync
The decentralized insurance protects against smart contract and market risk, it provides protection against asset loss or loss in the value itself. DeFi insurance works by decentralizing covers from a deceentralized pool of coverage provider. You can decide to participate in said pools as a liquidity provider and act as a coverage provider by locking up capital in said pools. As a coverage provider you earn interest on the capital you lock up as a coverage provider. This interest is paid for using the coverage buyers’ premium.
As a coverage buyer, coverage will cover the risks mentioned through the cover description itself, certainly the best way to use DeFi protocols confidently.
Popular insurance protocols in DeFi include Nexus Mutual (NXM), InsurAce (Insur), Unslashed Finance (USF)
These enable rapid and trustless transfer of value between two parties, to facilitate trade and commerce. Fully decentralized solutions that offer customers a simple and user-friendly way to make payments.
Popular payment protocols in DeFi include xDAI, Sablier. zkSync
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