DeFi Basics

Understanding DeFi

DAO - Decentralized Autonomous Organization - an independent and not controlled organization works through smart contracts and develops in the Dapp's environment, in parallel develops improved types of products in the DeFi sector, to the general understanding, it was DAO projects that gave new life to alternative finance, which became necessary in the use of everyday life .

DLT - is a distributed ledger technology. A distributed ledger is an online record of data and transactions.

Centralized - data is stored in one central place - bound to a control located in one point or entity.

Decentralized - data is stored in many places.

Distributed - a network in which devices are connected and communicate with each other, as in communication and computing.

Decentralized finance - DeFi for short - refers to a complex financial ecosystem on the blockchain. DeFi stands for Decentralized Finance, a general term that includes all financial networks, platforms, applications, and assets built on blockchain that do not depend on a single institution or organization to operate. The main difference between DeFi and TradFi - traditional finance, also called "legacy finance" - is the lack of intermediaries or third parties. Indeed, where TradFi needs a bank, broker, or payment service provider, DeFi relies on computer code, blockchain technology, and smart contracts. As a result, decentralized finance applications allow their users to interact with each other without trust, directly and privately, while saving time and money.

How DeFi Works

Decentralized finance is based on three pillars: cryptocurrency, blockchain technology and smart contracts. Cryptocurrency allows you to tokenize any asset or product. In turn, tokenization makes these assets liquid, easily exchangeable and transferable on the blockchain. On the other hand, Blockchain technology records all data and transactions in a public ledger, providing transparency and decentralization. Instead of a supervisory institution such as a bank or a broker, it is the blockchain nodes that verify and validate transactions between users. And smart contracts add automation functionality. These are self-executing computer programs between two or more parties that contain certain terms and conditions. The former establish the terms of the agreement, which are automatically applied by the contract if the latter are observed.

By combining these three technologies, developers can create all sorts of platforms and applications that allow users to access multiple financial products and options without the involvement of third parties.

DAPP'S - decentralized applications

DeFi applications - decentralized finance refers to an ecosystem of platforms where users make transactions without intermediaries. We call these platforms "decentralized applications" or dApps.

Decentralized applications are built on blockchain networks and use smart contracts to provide various financial products to their users. There are many types of dApps depending on their functionality and use cases.

The most popular types of decentralized applications are:

DEX or decentralized exchanges.

DEXs are cryptocurrency trading platforms that allow users to exchange one cryptocurrency for another. Users connect to DEX directly from their wallets, which means they don't have to trust their assets to a third party. In addition to trading, most DEXs allow other forms of participation, such as providing liquidity or placing bets. These features improve platform performance and reward users for their contributions.

Lending and borrowing protocols

These loan applications connect lenders and borrowers through smart contracts. Lenders "lock" their assets in the smart contracts of the platform and receive income in exchange for their deposit. Meanwhile, borrowers can take out these assets as a loan after pledging a certain amount of funds. As a result, smart contracts provide secure, trustless and direct loans between two parties without intermediaries, which significantly reduces their fees.

Synthetic assets

Many decentralized applications focus on the creation of synthetic financial products through tokenization. These platforms allow the exchange of real or physical assets on the blockchain. Many protocols have created crypto-tokens with a 1:1 peg to fiat currencies - the so-called stablecoins - securities, company shares, commodities such as gold, oil or other cryptocurrencies. As a result, users can invest in these types of assets directly from their crypto wallet, saving on brokerage fees and cumbersome bureaucratic processes and paperwork.

Derivative finance is an agreement in a crypto project, under which the parties acquire the right and undertake to perform certain actions in relation to an asset surrogate, we provide for the opportunity to buy assets of a production nature for investors. It also provides for the possibility of deploying your own token on a smart contract, and this is a potential opportunity for a private person to find funding.

Various financial instruments

Some dapps don't specialize in one feature, but offer a variety of financial options in addition to those listed above, including:

Yield Aggregators: Protocols that automatically reinvest your earnings in an effort to maximize returns from other platforms.

Staking Pools: These platforms allow you to secure proof-of-stake networks without running a validator node.

Lottery: Decentralized gaming sites offering various games and contests that users can enter to win prizes.

Prediction Markets: Platforms where users can speculate and bet on the outcome of certain situations or the direction of the price of a particular asset.

Risks and Opportunities of DeFi

Decentralized finance offers users a number of benefits. Eliminating intermediaries simplifies the transaction process and saves significant commissions and costs for the interacting parties. In addition, smart contracts and blockchain technology provide security and transparency. All parties involved can check the terms of the transaction before depositing their funds and access all information about the transaction immediately after it is made. On a global scale, DeFi allows people from all over the world to access financial products that would otherwise be inaccessible to them.

However, interacting with DeFi applications requires huge responsibility from users. Being decentralized and not mediated, the safety and security of assets depend solely on their owners.

Users are liable for any losses resulting from hacking, participation in fraudulent platforms, or any other risks associated with DeFi. That's why it's vital to do your own research and review security best practices. Decentralized finance empowers people when it comes to private, direct transactions with each other and access to a wide range of financial opportunities, but it comes with risks.

DYOR - Own investigation

- one of the most fundamental aspects of experimenting with DeFi is security. Before approving any smart contracts or connecting your wallet to a website, always do your own research to avoid scams and losses.

Problems of market conditions for the exchange of digital currencies are not safe enough and reliable in decentralized exchangers that have both pros and cons.

Decentralized exchanges, also called DEXs, are decentralized applications - dApps - built on blockchain networks that allow you to trade cryptocurrencies. In other words, these are online platforms that allow users to exchange one cryptocurrency or token for another. Users can access DEX directly from their crypto wallets, which means they do not need to trust their assets to a third party.

In addition, besides trading and exchanging tokens, most decentralized exchanges allow other forms of participation such as providing liquidity, governance, or staking. These features improve platform performance and reward users for their contributions.

Types of decentralized exchanges

Decentralization means that these platforms are not dependent on any financial institution or organization. Users can exchange their assets and complete buy and sell orders without any intermediaries. How is this possible? Although all decentralized exchanges use blockchain networks and smart contracts, we can divide them into three different types depending on how they achieve this.

Order books

Order books are registers in which all open orders of users for the exchange of one asset for another are collected, always within a specific trading pair. Users can create buy or sell orders where they specify how much they want to pay for a particular token or how much they want to get for selling it.

Similar to centralized exchanges, when a buy order matches a sell order for the same token and price, the DEX will automatically execute them both, delivering the respective assets to each party.

The spread between the prices of all orders also determines the depth of the order book and the market price on the exchange. However, order book based platforms can suffer from a lack of liquidity as they require matching orders to execute trades.

Automated market makers (AMM)

To solve these liquidity problems, automated market makers were created. Their system is based on smart contracts that can store user funds, locking them up in pools as liquidity for a specific trading pair. These liquidity pools collect assets from users, rewarding them with a small percentage of every trade made on that pair in order to encourage them to provide liquidity. This is a popular passive income strategy in decentralized finance called "liquidity mining". Essentially, a user wishing to exchange a certain token for another calls a smart contract function that deposits a certain amount of token A into the liquidity pool and withdraws its equivalent market value in token B, sending it to the user's wallet.

Automated market makers (AMM) provide instant, automated and decentralized trading using algorithms to value assets in liquidity pools, offering high liquidity, low transaction fees and 24/7 uptime for as many users as possible. However, they are also at risk, such as erroneous or vulnerable smart contract code or high slippage due to low liquidity.

Aggregators

As the name implies, aggregators resort to other protocols, platforms and mechanisms to obtain and accumulate liquidity. Using this method allows decentralized exchanges to minimize slippage, optimize prices, lower fees, and generally improve efficiency and user experience. In simple words, they collect data from a wide range of other decentralized exchanges and allow their users to make split trades, offering the best prices, commissions and experience in a short time.

Reducing pricing inefficiencies such as slippage and reducing the chance of failed transactions are other important benefits of DEX aggregators. To achieve maximum optimization and efficiency, these platforms use mathematical algorithms that take into account many factors when choosing the best provider for a given token exchange.

Benefits of decentralized exchanges Using a decentralized exchange compared to a centralized trading platform offers many advantages:

Anonymity and privacy: You do not need to go through any registration processes or enter your personal data (KYC) to use the decentralized exchange. The only requirement is to have private keys to the browser wallet with enough funds to pay network fees. Your keys, your coins: Centralized exchanges offer custodial wallets, which means they store each user's private keys. Thus, they can freeze accounts, cancel trades and orders, or even confiscate funds. In decentralized exchanges, you have complete control.

No counterparty risk:

Counterparty risk is associated with the person involved in the transaction. Being protected and secured by smart contracts, this risk is reduced by DEX. Wider token offerings: Centralized exchanges only list tokens that comply with legal regulations and requirements. On the contrary, on decentralized exchanges, you can find all kinds of tokens. Some DEXs even allow users to create trading pools for new tokens with matching trading pairs.

Vulnerability of smart contracts: the code is perfect, but the people who write it are not. Sometimes the smart contract code can be buggy, have vulnerabilities and be used by hackers or whales. It is important for security to validate and validate dApps code. If you don't know how to do this, there are vetted and recognized auditors you can turn to.

Increased Responsibility: Yes, owning your private keys means no one can get hold of or access your assets. However, this also means that you are solely responsible for their safety and security. This includes keeping your private keys secret, as well as doing your own research on the tokens you buy, looking at the protocol code, and verifying all the information you find. No one can help you if you make a mistake. Decentralized exchanges offer a number of benefits for cryptocurrency traders, but they also require a basic understanding of blockchain, smart contracts, and advanced security practices.

It is important that DEFI users be careful and do their own research on the platforms and tokens they interact with, because no one else will do it for them. -to dig deeper through financial - social experiments.

TVL is an abbreviation for Total Value Locked. This is the net worth of the USD equivalent of all cryptocurrencies locked in the crypto project’s treasury/reserve smart contracts.

APY - annual percentage yield or annual percentage yield. Shows the annual return, taking into account the regular reinvestment of profits.

APR - is the annual interest on a particular debt. When a user takes out a loan of any type, his lender assigns him a certain interest rate (APR).

API - (Application Programming Interface or Application Programming Interface) is a set of tools and functions in the form of an interface for creating new applications, thanks to which one program will interact with another, allows developers to extend the functionality of their product and connect it with others. Most large companies develop an API for clients or for internal use, the API allows you to connect to the exchange, giving you access to real-time market data, making trades and managing your account.

Rewards - free tokens that are distributed for participation in the launch of the project to the first users and those who provide liquidity, as a rule, they are the highest at launch.

Dapp (Decentralized Application) is a decentralized application, an open source program that works autonomously and stores its data in the block chain.