What is DeFi
Instead, they operate on a decentralized network using smart contracts, which are self-executing contracts that automatically enforce the terms and conditions of a transaction, allowing users to transact directly with each other without the need for traditional financial institutions. This allows for greater transparency and accessibility compared to traditional finance.
What is Smart Contract? How does Smart Contract work? Please refer to the "What is Smart Contract" chapter.
DeFi offers a wide range of financial services such as lending, borrowing, trading, investing, yield farming, and more, all without the need for intermediaries such as banks, brokers, or exchanges. Users can access these services using their crypto wallets and cryptocurrencies and interacting with protocols' smart contracts. Here are some examples of DeFi applications:
- Decentralized Exchanges (DEXs): These are exchanges that allow users to trade cryptocurrencies directly with each other without the need for an intermediary. Examples of popular DEXs include Uniswap, Curve, Balancer, PancakeSwap, and SushiSwap.
- Decentralized Lending & Borrowing: These platforms allow users to lend or borrow cryptocurrencies without the need for a traditional bank or lender. Examples of popular DeFi lending and borrowing platforms include Aave, Compound, and MakerDAO.
- Decentralized Stablecoin: These are cryptocurrencies that are designed to maintain a stable value, usually pegged to a fiat currency like the US dollar. Examples of popular decentralized stablecoins include DAI and FRAX.
- Yield farming: This involves users earning rewards by providing liquidity to DeFi platforms. Users can earn rewards in the form of new tokens, fees, or other incentives. Examples of popular yield farming platforms include Yearn Finance, Convex Finance, and Alpha Homora.
These are just a few examples of the many types of DeFi applications that exist.
Here are some popular DeFi ecosystems:
- Ethereum: Ethereum is the most popular and widely used DeFi ecosystem, with a vast network of decentralized applications (DApps) and protocols that enable various financial services such as lending, borrowing, trading, and more. Many of the DeFi protocols and tokens are built on top of Ethereum's blockchain, utilizing its smart contract functionality, such as Compound, Uniswap, Curve, and Aave.
- BNB Chain (BSC): BNB Chain is a DeFi ecosystem developed by Binance. After the 2020 DeFi Summer, to compete with Ethereum, Binance developed a public chain system that supports EVM called BSC (formerly known as Binance Smart Chain), intending to provide a faster and cheaper option than Ethereum. The native token of BSC is BNB, and the token format is BEP20. BSC supports many DeFi protocols and tokens that are similar to Ethereum, and the gas prices are low, which has made it a popular choice for users and grassroots project developers.
- Solana: Solana is a high-performance blockchain that uses Proof of History as its consensus mechanism. It was once widely popular due to its fast transaction speed and low fees. During the 2021 bull market, many DeFi protocols were built on Solana, including well-known projects such as the order book DEX Serum, Launchpad Raydium, and derivatives platform Mango.
- Polkadot: Polkadot is a multi-chain ecosystem that allows different blockchains to connect and communicate with each other. This allows for interoperability between different DeFi protocols and networks, enabling users to move their assets seamlessly across different platforms.
- Avalanche: Avalanche is a DeFi ecosystem that is designed to provide high throughput and low latency for decentralized applications. It offers a range of DeFi protocols, including a decentralized exchange, a yield farming platform, and a lending and borrowing platform.
The DeFi ecosystem is constantly evolving, with new protocols and platforms being developed and launched regularly. As a beginner, it's important to do your own research and understand the risks involved before investing in any DeFi project or token.
Overall, DeFi represents a new era of finance that is open, transparent, and accessible to anyone with an internet connection and has the potential to revolutionize the way we think about money and financial services.
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