What should you know about DeFi?

Why is DeFi important?

How does DeFi differ from traditional finance?

How are DeFi applications created?

Advantages of DeFi

  • Accessibility. It has easy access to financial services, especially for those who, for some reason, are isolated from access to the current economic system.
  • Transparency. Decentralized finance is built on the principle of openness. All transactions are recorded on the blockchain and available for anyone to see. This level of transparency is impossible with traditional financial institutions.
  • Security. Due to the fact that decentralized finance protocols are built on the blockchain, they are much more secure than traditional systems. Blockchain technology is immutable, which means that once a transaction is recorded on the blockchain, it cannot be changed or tampered with.
  • Speed. Blockchain technology allows for much faster transaction times than traditional systems. In most cases, transactions on the blockchain are confirmed within a few seconds.
  • Lower fees. Another advantage of decentralized finance is that it has lower costs than traditional financial institutions. There is no need for intermediaries such as banks or other financial institutions.
  • No bureaucracy. Unlike the traditional financial sector, there are no controllers or accounts that require complex forms to be filled out.

Risks of DeFi

  • Volatility. Cryptocurrencies are notoriously volatile, and this volatility extends to the world of decentralized finance. The prices of DeFi protocols can fluctuate wildly, which can lead to losses for users who are not careful about when they enter and exit positions.
  • Hacks. Unfortunately, the world of cryptocurrency is not immune to hacks. In 2016, the DAO hack led to the loss of over $50 million worth of ETH. And in 2018, the Parity Wallet hack resulted in the loss of over $30 million worth of ETH. These hacks highlight the importance of choosing a secure wallet to store your cryptocurrencies in.
  • Fraud. In 2021, attackers stole more than $10 billion in investments using decentralized finance technology. Fraudsters issue dummy tokens and lure investors with promises of extremely high returns. The standard scheme is to wait until the trading in the pool “warms up” and the token price jumps up, then withdraw all the liquidity and disappear with the money.
  • Complexity. The world of cryptocurrency can be complicated and confusing for newcomers. The same is true for decentralized finance protocols. Many DeFi protocols have complicated user interfaces that can be difficult to understand for those unfamiliar with them. This complexity can lead to users making mistakes that result in losses.
  • No regulation. Financial institutions are not responsible for the actions of participants within the system. Therefore, it will not be possible to ask for help or service. If the user loses the password or does something wrong, these are exclusively his problems.

Potential use cases

The future of DeFi

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