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What is DeFi?

What is DeFi?

DeFi or decentralized finance is the loud buzz in the cryptocurrency industry since 2019. However, things changed drastically in 2020. In the time of writing, the Total Locked Value (TLV) in DeFi is at $6.7B.

The year 2020 has not been the kindest. However, the cryptocurrency industry managed to defy the odds. 

Understanding DeFi

Imagine you went to the bank to apply for a bank account, to apply for a loan, or to invest in products that the bank offered. You also want to transfer money, exchange currency, and receive some grants from the government. These are services and instruments provided by the banks and government.

DeFi offers similar services and instruments but in a decentralized fashion. That means there are no middle parties involved in any of the transactions.

The technology

The key technology in realizing this is blockchain. If you are wondering about blockchain, check our guides for newbies below.

What is Blockchain?

What are Smart Contracts?

What does it offer?

By utilizing smart contracts in a blockchain like Ethereum, there are plenty of instruments and services offered through DeFi. Currently available services are Lending, Decentralized Exchange (DEX), Derivatives, Payment, and Asset.

Through these services, users have better control of their finances compared to centralized services.

What are the benefits?

All the services are available by having an internet connection and a computer or a smartphone. Users do not have to travel to any branches or headquarters, 24/7 availability, low minimum investments, contactless, and suits users who prefer the digital lifestyle.

DeFi also offers attractive returns and lower fees compared to its centralized counterpart. 

Top 10 DeFi Projects

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According to DeFi Pulse, these are the top 10 DeFi projects out there based on TLV. (as in 24/8/2020)

  1. Maker – Lending
  2. Aave – Lending
  3. Curve.Finance – DEX
  4. Yearn.Finance – Assets
  5. Compund – Lending
  6. Synthetix – Derivatives
  7. WBTC – Assets
  8. Balancer – DEX
  9. Uniswap – DEX
  10. InstaDApp – Lending

The Risks

There is no such thing as risk-free when it comes to financial matters. It is not impossible to lose our money from our pocket. The same goes for the growing DeFi space.

The biggest issue is the legality and governance of the government. Users might be involved in money laundering or tax evasion without knowing it. This creates challenges and grey in the financial system of a country.

Other than that, there are risks of hacking and breach by irresponsible parties. There are cases where funds were stolen by hackers, by exploiting coding weaknesses and vulnerabilities. There are also cases of users manipulating the platform for personal gains.

DeFi indeed is an exciting space and to be this early is a big opportunity. Users should do their due diligence and research before using or investing in any projects. 

Will this DeFi craze withered out like ICOs in 2017?

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