Decentralised Finance or more commonly known as DEFI in the crypto community, is a blockchain based form of finance, which aims to democratise finance by replacing the legacy institutions (who make their cut by charging a premium for services), with a full scope of peer-to-peer solutions from everyday banking, lending and insurance to more complicated trading and other financial contracts.
Financial Services built on top of distributed platforms with NO central intermediaries which often use algorithms to process data at the speed of light. This sounds like something from the future, but here we are deploying capital on a daily basis in order to make more or just do basic financial transactions.
DEFI makes use of smart contracts on the blockchain to cut out the centralised gate keepers as we know them today, banks, Insurers, exchanges and brokerages, and allows the everyday person to be fully in control of their finances.
DEFI allows one to earn interest, speculate on digital assets, insure against risk and lend/borrow assets freely with anyone else in the world, instantly and in most cases very affordably.
DAPS, Protocols and Governance Tokens allow DEFI to make the following types of transactions using smart contracts that are stored on a blockchain making them immutable and trustless.
- Traditional financial transactions. Anything from payments, trading securities and insurance, to lending and borrowing.
- Decentralized exchanges (DEXs). Most cryptocurrency investors use centralized exchanges like Coinbase. DEXs facilitate peer-to-peer financial transactions and let users retain control over their digital assets like Serum.
- Wallets. DEFI developers are creating digital wallets that can operate independently of the largest cryptocurrency exchanges and give investors access to everything from cryptocurrency to NFTs. Metamask already integrates ETH and BSC.
- Yield farming. DEFI makes it possible for speculative investors to lend crypto and potentially reap rewards in Interest when the proprietary coins DEFI borrowing platforms pay them for agreeing to the loan appreciate rapidly.
- Flash loans. These are cryptocurrency loans that borrow and repay funds in the same transaction. How it works: Borrowers have the potential to make money by entering into a smart contract, on the Ethereum blockchain, that borrows funds, executes a transaction and repays the loan instantly. If the transaction can’t be executed, or if it will execute at a loss, the funds automatically go back to the lender. If you make a profit, it yours, minus any interest charges or fees. These are called flash loans and in principle are decentralized arbitrage.
- Non-fungible tokens (NFTs). NFTs create digital assets out of typically non-tradable assets, like videos, music or art. NFTs commodify the previously uncommodifiable.
The Defi space is unregulated which is partly why this space is exploding and one can argue that DEFI will do what the internet has done to almost every other sector in the tech space. Disruption is inevitable and large Financial Institutions are at risk. Data suggests that the financial sector extracts around 9 trillion dollars worldwide annually from the worlds economy. Some finance giants like VISA have already adopted Bitcoin and Ethereum as well as stable coins Like USDC to start participating in DEFI.
Remember DEFI is new and radical, but it comes with its own fair amount of risk. Hackers and scammers are a real risk but with a few security tips and by doing your own research you can navigate the space pretty easily. Remember when something sounds too good to be true it probably isn’t.
There are no Consumer Protection laws so everything in the ecosystem needs to be treated as a test first. Send small amount of crypto to test out all the different contracts and protocols as well as DEXs.
Mark Cuban has been very vocal lately about DEFI and NFTs and has started to invest in some of the more prominent tokens available as well as putting his money where his mouth is and started an NFT platform lazy.com
Dan Shimerman from the IOTA Foundation told Forbes “Investors will soon have more independence, which will allow them to “deploy assets in creative ways that seem impossible today,” he added “DeFi also carries big implications for the big data sector as it matures to enable new ways to commodify data”
HOW TO GET STARTED WITH DEFI
FTX has really focused on Defi and is backed by one of the biggest DEFI investors, Alameda Research.
When Sam Bankman-Fried saved SushiSwop and was hailed a DEFI hero, things really took off in the DEFI space.
The FTX platform allows you to do many DEFI transactions in a almost risk free manner.. Remember “not your keys not your coins” and, funds held on an exchange are always fair game for hackers, but in terms of the Staking and Lending/borrowing function it is very easy to get a feel for the DEFI space.
The most popular DEFI activity on FTX is the lending of your own USDC to other traders. The funds are backed by the exchange and the interest rate has wild swings from 20% APY to 100% APY regularly The Interest are paid out into your account each hour, you soon start understanding why it makes sense to move your savings account to a DEFI alternative.
You can also borrow funds to take Spot margin positions against your Crypto in your wallet.
FTX also allows you to stake coins and receive a reward in return for validating the network, or in some instances earn a dividend for believing in a project. Currently some of the best earners are the Raydium and Solana staking contracts.
FTX also allows you to speculate on DEFI by making a DEFI Index available to trade perpetual contracts instead of buying up crypto projects directly.
To join a world class exchange, which is built by traders for traders and allows South Africans to deposit directly in ZAR simply click this link and get started in DEFI.