DeFi, the acronym for Decentralized Finance, is increasingly gaining traction and wider adoption in the blockchain and cryptocurrency space.
Since the DeFi summer in 2020, it has seen incredible growth amongst cryptocurrency and blockchain enthusiasts that have helped drive its adoption through the roof.
The Total Value Locked (TVL) across all Defi protocols according to https://defillama.com/ is $55.51 billion as at the time of writing this piece.
While the history of DeFi can be traced back to the invention of Bitcoin as the first decentralized peer-to-peer digital money, the key breakthrough came from Ethereum and it’s incredible use case – the ability of open-source, permissionless, and trustless decentralized applications (DApps) to be deployed on it through the use of smart contracts. While Ethereum was DeFi’s original home, most blockchains with smart contract capabilities now host DeFi DApps. Some of these blockchains include Fantom, Avalanche, Solana etc.
Smart contracts are programmable contracts that allow two counterparties to set conditions of a transaction without the need for a third/centralized party.
You might be wondering what this might mean…
Well, hang on to your seat because you’re about to find out.
What is DeFi?
Decentralized Finance or DeFi is the movement that allows users to access financial services via the use of dapps as opposed to traditional/centralized financial institutions.
This movement is aimed at creating open-source, permissionless and transparent financial services which allows users to have absolute control of their money.
These range of financial services include:
- Lending and borrowing.
- Decentralized Exchanges.
- Yield farming.
- Asset management.
So far, DeFi has allowed people to optimize their yield, join decentralized marketplaces, access banking services, and engage in quick borrowing and lending.
However, DeFi isn’t without its risks, and you should always research any project carefully before taking risks.
Some of these risks include:
- Smart contract risks:
- Exploits and vulnerabilities.
- Scams – Rug pull
- Impermanent loss
HOW TO START?
To start on Defi, you need
- A non-custodial wallet such as Metamask, Trust wallet etc. to connect you to DApps.
- Cryptocurrency such as BNB on Pancakeswap for gas fees or ETH on Aave for lending & borrowing etc.
One thing to have top-of-mind: The space is nascent and still experimental so it’s important you understand that this space is riddled with risks, scammers and errors.