What Is DeFi and How It’s Related to Trading?
Have you ever come across the term DeFi? It is mostly used while dealing with cryptocurrency. DeFi = Decentralized Finance. Although cryptocurrency runs on the blockchain platform, it is not completely decentralized.
Most of the crypto trading platforms are centralized. And many crypto projects that are launched are managed through centralized companies. While the whole point of blockchain and crypto is decentralization, there are some aspects where centralized authorities are involved. But this is going to be changed with the introduction of DeFi. It aims at the complete decentralization of the financial system.
If you want to know more about DeFi, read our post to find out. In this post, we are going to explain what exactly DeFi is and how it is related to crypto trading.
DeFi: What is it?
DeFi = Decentralized Finance. It is also known as Open Finance. DeFi aims at making the entire financial system and payment system accessible to all by decentralizing it. There will be no central authority. No matter where you live, you can easily access finance with the help of DeFi.
All the financial service which you use today is managed by some of the other central authority like banks, insurance companies, brokers, centralized crypto exchanges, etc. But DeFi will create an ecosystem where decentralized technology will be used to get all these services.
There will be o middle man and extra cost involved. You can access all the financial services from your smartphone. DeFi uses smart contracts technology. Smart contacts run on various blockchain platforms.
The most common platform where you can develop smart contracts is Ethereum. These contracts are self-executing. If the condition is met, the transaction will take place. It is completely decentralized. Using this DApps are created. These are known as decentralized apps. These apps work without any centralized authority.
DeFi works on these apps. In short, DeFi is a blend of protocols, crypto assets, DApps, and Smart contracts. All these elements will be combined together on blockchain technology to facilitate the decentralization of finance.
Most of the DeFi applications are created on the Ethereum Platform. Apart from this, there are many other blockchain platforms where DeFi apps can be created.
Example:
dYdX is a decentralized trading platform. It is a perfect example of DeFi technology. It is created on the Ethereum blockchain platform. Centralized exchange development only includes blockchain technology. But this decentralized platform is developed using blockchain as well as smart contracts.
Users can use this DApp to trade with each other without any involvement of central authority. You can even use margin from trading. You can open and close a long and short position on this platform. In this platform, you can trade Ethereum. You can use other cryptocurrencies like DAI and USDC to trade.
You will be allowed 5X leverage. You can even use this platform for lending and borrowing cryptocurrency. Here, you will in control of your own crypto wallet, and the transaction will take place on the basis of smart contracts created for the app. You can access it from your smartphone as well.
Benefits of DeFi:
Here is a list of all the benefits of DeFi. It is not only beneficial for crypto trading but for other financial services and sectors as well.
Global Access: More than 2 billion people have no access to nans and any other financial service. DeFi is going to change this. It is created for all. There is no geographical limitation. Anybody with a smartphone can access DeFi.
· Affordable:
As there is no middle man, you can save a lot of money by eliminating transaction cost. You can save 4% of your transaction cost with DeFi.
· Security:
As this technology works on blockchain and smart contracts, it is very safe. Smart contracts cannot be changed or manipulated, so it is safe to use.
· User-friendly:
DeFi apps are user-friendly. It is simple to use. It works like any other app on the smartphone.
· Transparency:
It is created on the blockchain, which is an open ledger. All the transactions are recorded here, so there is nothing to hide.
· Permission less:
DeFi apps can be created by anyone and used by anyone. There are no restrictions, and no permissions are required.
· Interoperable:
You can combine various DeFi products by building a single app. This way, you can combine many financial services in a single app to make a completely new app.
DeFi and Crypto Trading:
Now that you know what exactly DeFi is, it’s time to understand how it is related to crypto trading. Here we will show you the relationship and involvement of DeFi in cryptocurrency trading.
· Open Lending:
It is a money lending platform that is completely decentralized. Here instead of banks, the transaction takes place with the help of smart contracts and DeFi apps. You can deposit your cryptocurrency here, and others can borrow it. You will get a higher rate of interest, as there are no middlemen. You can even use arbitrage or price difference and trade.
Example: MakerDAO is one lending protocol based on DeFi. Dharma and BlockFi are other examples of the lending protocol.
· Stablecoins:
Stablecoins are crypto coins which lack volatility. These coins are pegged to USD, so it is stable. It can also be pegged with gold reserves. You can create your own stable coins with DeFi.
Example: Maker is a project where DAI coins are pegged to USD. With Maker Oasis DApp, you can create your own stablecoin. USD Coin is another example of stablecoin.
· Decentralized Exchange:
It is an exchange platform where people can trade in cryptocurrencies without the involvement of any central authority. It is also known as DEXes. These exchanges work on smart contracts and DeFi protocol. Here you don’t have to depend on the exchange to hold your funds or execute the transaction. You will be in complete control here. There is no intermediary required for trading. Most White label crypto exchange platform uses DeFi technology fir decentralized trading.
Example: IDEX is one of the most popular decentralized trading platforms. It is a DApp built on the Ethereum Platform. Another example is Binance. It has both centralized as well as decentralized exchange platforms.
· Open Marketplaces:
It is another platform where you can trade in crypto collectibles. They are also known as NFT’s. It means non-fungible tokens. You can trade in such tokens without any presence of an intermediary. Smart contracts which are built on Ethereum are used to run this platform.
Example: OpenSea is an example of a trading platform where you can trade in crypto collectibles. It works on DeFi protocol.
· Issuance Platforms:
These are decentralized platforms where you can create security tokens. The creation and issuance of tokens don’t require any middle man. Everything works on DeFi protocol.
Example: Polymath is an example of a decentralized issuance platform. Here you can create security tokens at an affordable price.
· Decentralized escrow:
These platforms provide escrow services. With this platform, you can trade in a centralized crypto platform without giving them any authority over your funds, wallets, and transactions. It means you can trade in a centralized platform without any middle man.
Example: Arwen is a platform that provides escrow services. You don’t have to deposit your funds with centralized platforms. Here smart contracts are used for executing the transactions. It a product of DeFi.
· Synthetic Assets:
In this decentralized platform, you can create and exchange assets. These are the synthetic version of gold and other cryptocurrencies. They are backed by collateral. Here there is no intermediary required for trading. It is a product of DeFi in the form of DApp. It uses smart contracts to execute the trade.
Example: Synthetix is an example of a synthetic asset platform. It is a decentralized platform.
DeFi Apps created on Ethereum Platform:
Here are some of the popular DeFi apps which are created on the Ethereum Platform.
· Maker: It is a decentralized lending platform.
· Synthetix: It is a decentralized investment platform.
· Compound: It is a decentralized money markets platform.
· InstaDApp: It is a smart wallet where you can store cryptocurrency for decentralized finance.
· Uniswap: It is a decentralized exchange platform.
· dYdX: It is a decentralized trading platform.
· bZx: It is a decentralized borrowing platform.
· Bancor: It is a decentralized exchange platform.
· WBTC: WBTC = Wrapped Bitcoin. It is a different version of Bitcoin, which is built on the Ethereum platform.
· Set protocol: It is a decentralized platform where you can buy strategy enabled tokens.
This is all you need to know about DeFi. Like smart contracts and blockchain, DeFi has become an important part of crypto trading. Most of the white label crypto exchange software is inspired by DeFi technology.
