DeFi 101: Decentralized Finance for Dummies

The world of finance is being disrupted by a new technology called decentralized finance. In this article, we seek to explain DeFi to absolute beginners, using everyday grammar.

In March of 2021, a friend of mine called me to ask for my views on an investment opportunity. He explained that the platform was asking him to deposit some crypto assets for 3 months, in return for 300% returns.

I decided to look at the platform critically, to see if it was a scam or if it was a gem. After 2 hours of research I called him back. “Ed, it is not a ponzi platform. It is a DeFi Staking Pool. I can’t guarantee the safety of the platform, but from all looks it is worth a try.”

Ed made 500% profit from his investment in the staking pool. He used the profits to invest in other DeFi pools. Some returned huge rewards and others failed.

DeFi — short for decentralized finance — is a new vision of banking and financial services that is based on peer-to-peer payments through blockchain technology.

What is Decentralized Finance?

DeFi  is a financial system that uses the blockchain to enable and facilitate financial transactions. It stands for Decentralized Finance, and is powered by Blockchain technology. This removes the third parties involved in financial transactions such as banks and other institutions.

The currency used in decentralised finance is cryptocurrency. This is because blockchain technology has the supportive structure required for DeFi transactions. Decentralized apps (or Dapps) and smart contracts are used to carry out DeFi transactions.

What are the Uses of DeFi

DeFi offers a better way to carry out financial transactions. Among the several usecases of DeFi, these are the most prominent:

  1. Yield Farming: Yield farming is the process of using decentralized finance (DeFi) to maximize returns. Users lend or borrow crypto on a DeFi platform and earn cryptocurrency in return for their services.

  2. Staking: Crypto staking involves “locking up” a portion of your cryptocurrency for a period of time as a way of contributing to a blockchain network. In exchange, stakers can earn rewards, typically in the form of additional coins or tokens.

  3. Derivatives: In decentralized finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying ‘thing’ can be an asset, commodity, index, or interest rate or even another derivative.

  4. Insurance: This is how DeFi insurance works. You buy insurance coverage against a specific event. This ensures you are protected against capital loss due to this event. The premium you pay for this coverage depends on multiple factors such as the coverage duration, covered amount, and the covered event.

  5. Lending: Defi lending platforms aim to offer crypto loans in a trustless manner, i.e., without intermediaries and allow users to enlist their crypto coins on the platform for lending purposes. A borrower can directly take a loan through the decentralized platform known as P2P lending.

  6. Liquidity Mining: This is the practice of lending crypto assets to a decentralized exchange in return for incentives. Participants contribute cryptocurrencies to liquidity pools for a certain exchange in return for tokens and fees depending on the quantity of crypto they contributed.

  7. DeFi Gaming: GameFi — a portmanteau of “game” and “finance” — involves blockchain games that offer economic incentives to play them, otherwise known as play-to-earn games. Typically, players can earn in-game rewards by completing tasks, battling other players or progressing through various game levels

There are also other applications of DeFi such as exchanges, lottos, tokenization, fundraising, audits and lots more.

What are the Advantages of DeFi?

DeFi has a lot of compelling benefits that have led to thousands of investors putting their money in DeFi platforms. These benefits are for entrepreneurs building defi products, for users of these platforms and for the society at large. . Here are some benefits of DeFi:

  • Permissionless: Anyone with a crypto wallet and an internet connection, regardless of where they are, can access DeFi services. You don’t need to pass through a rigorous account approval process on a DeFi platform.

  • Instant Transactions: DeFi products are instant. You can do any transaction you want in real time, 24 hours a day, 7 days a week.

  • Open: Every DeFi transaction on the  is broadcast to and verified by other users on the network. This level of transaction data transparency ensures any user can view platform activity.

  • Non Custodial: Your assets remain under your control. There is no third party holding your assets for you. DeFi only provides software for you to interact with your assets.

  • Secure: Data is immutable, secure and tamper proof. Nobody can delete transactions, or toy with the system.

  • Open source: ZinaX and other projects are built with open-source code, which is available for anyone to view, audit and build on. Developers can easily connect multiple DeFi applications built on open-source technology to create new financial products and services, without having to seek permission.

Most of the benefits of DeFi also apply to ZinaX. We are a secure, non-custodial DeFi platform that provides quality financial services to retail investors and cooperatives. I’d advise you join the ZinaX community on telegram to learn more about us. That said, let’s keep going

DeFi TVL of multiple blockchains combined as of June 26, 2022. The market size of decentralized finance market size declined to less than 80 billion U.S. dollars come June 2022. This is a significant change from 2021,when the size of the decentralized finance market reached heights it had not reached before

Despite being a very useful tool, Decentralized Finance comes with risks. These risks are real and can lead to loss of funds for investors. Great DeFi projects find ways to mitigate the risks and make DeFi safer for retail investors.

However, we would be enumerating the risks in the DeFi space, so you can be fully informed.

What are the risks

The risks of DeFi

DeFi offers new and exciting financial freedoms, but these come with risks. These risks include:

  • Immature: DeFi is a new innovation and has yet to be fully stress-tested at scale over an extended period. Funds may be lost or put at risk. 

  • Deposit Insurance: Many DeFi platforms do not have deposit insurance schemes. This means users often have little or no protection when things go wrong. No state-run reimbursement schemes cover DeFi and there are no laws enforcing capital reserves for DeFi service providers.

  • Rugpulls: This refers to project owners making away with investor funds or pulling out liquidity from Dex. While this happens also in traditional finance, it is a bit more rampant with DeFi.
  • High Collateral Requirements: Most DeFi lending transactions require collateral of at least 100 percent of the value of the loan, if not more. These requirements vastly restrict eligibility for many types of DeFi loans

  • Lack of Redemption: DeFi platforms do not have next-of-kin services or redemption plans. If you lose access to your wallet, you lose your funds forever. The project developers do not have the ability to recover your wallet.

Summary

ZinaX brings the benefits of DeFi to the everyday man. We advise you use the ZinaX platform to save your assets in DeFi, at a juicy rate. 

Get started today

Michael Bernard

Michael Bernard

4 Comments

  1. annabrown

    Reply
    22 April, 2021

    Wow, cool post, thanks for sharing.

    • cmsmasters

      Reply
      22 April, 2021

      Happy to be of service.

  2. Paul

    Reply
    16 July, 2022

    Learnt alot. THANKS

  3. Ankit kumar

    Reply
    16 July, 2022

    Great Article , Thanks for sharing 👌

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