What is DeFi and What Does DeFi Mean?
DeFi stands for decentralised finance. The main purpose of DeFi is to provide open and unrestricted access to any kind of financial service that you are looking for.
Prior to the advent of DeFi, the only option for users was to go down the route of traditional finance, such as banks or building societies.
Traditional financial institutions act as a gatekeeper to a number of services and sometimes limit and restrict their customers from using a particular service. DeFi turns traditional finance on its head by granting access to decentralised versions of traditional financial services and instruments as well as completely new financial solutions.
With DeFi it doesn’t matter where you are born in the world, whether that’s the United States or Uruguay, everyone with an internet connection is given the same access to the services that DeFi provides.
Key DeFi Concepts
Since its inception, DeFi as a concept has grown rapidly in recent years. The Ethereum platform is well known for hosting the vast majority of DeFi projects. The main DeFi concept is based on different decentralised applications known as DApps. DApps each perform a different role in terms of finance. These different roles are highlighted in the following list:
Lending & Borrowing
One of the main applications of decentralised finance is for borrowing and lending. The smart contracts used in DeFi connect both the lenders and borrowers, fix the terms of the loan and set the interest rate.
Stablecoins are cryptocurrencies that are pegged/directly follow currencies that are considered to be less volatile such as US dollars or precious metals like gold. USDC & Tether are two of the most popular stablecoins currently available.
For a more detailed look at stablecoins, have a look at our article here.
Yield farming is also known as liquidity mining, cryptocurency holders yield farm in order to gain the highest return available.
In order to yield farm, cryptocurrency holders place their funds in a DeFi protocol in order to provide liquidity to a particular pool. Liquidity pools are smart contracts that contain funds. Once a user has provided liquidity they are rewarded with either interest or fees.
Staking is used in Proof of Stake blockchains, users must lock up their crypto assets in order to stake and in turn earn rewards for staking. In January 2021 staking in DeFi platforms reached a high of over $21 billion.
One of the most highly anticipated staking platforms is Ethereum 2.0, this will happen when Ethereum transfers from Proof of Work to Proof of Stake.
Maker, Synthtetix, Yearn Finance and Compound are some of the most popular cryptocurrencies for staking.
What are the Top 10 DeFi Tokens?
At the time of writing, the top DeFi tokens by market cap are:
4. Wrapped Bitcoin
8. Pancake Swap
9. Sushi Swap
This article has given an overall view of DeFi and the revolutionary potential that it has to turn traditional finance on it’s head. There are thousands more variations and uses that DeFi has that have not been mentioned in this article.