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A Beginner’s Guide to Decentralized Finance (Defi)

Decentralized finance commonly referred to as Defi, refers to a financial ecosystem that is not subject to the central financial intermediaries like banks, exchanges and brokerage firms but rather utilizes blockchain technology specifically decentralized applications (dapps).

The main objective of Defi is to create a financial system that is open-source, permission-free and transparent that allows anyone to participate regardless of their financial muscle and geographical location. The participants of a decentralized finance ecosystem maintain full control over their assets and interact with the Defi ecosystem through Defi application platforms, which are currently mostly based on Ethereum blockchain.

Advantages of decentralized finance

Traditional financial systems are centralized and very reliant on intermediaries like banks and arbitrators like courts, which makes transactions expensive and time-consuming especially due to the numerous paperwork that is required.

On the contrary, Defi systems do not rely on intermediaries or arbitrators. As the name suggests, they are decentralized giving asset holders the right to manage their assets as they interact with the ecosystems. Also, the code in blockchain smart contracts specifies how every possible dispute that arises should be handled thus knocking out the necessity for third-party arbitrators.

By avoiding the services of intermediaries, Defi drastically reduces the costs since the costs associated with providing and using the services of these intermediaries are eliminated. The transactions are also more frictionless compared to those of traditional financial systems.

By using blockchain, financial services offered by Defi platforms are not susceptible to single points of failure since the dynamic recording of immutable data on blockchain networks makes potential shutdown and censorship of such services an intricate undertaking.

Decentralized finance platforms are also accessible to everyone as long as they have access to the internet. Participants also are not restricted by their financial capabilities as is the case with traditional finance systems.

Decentralized finance use cases

There are three main areas where Defi is making headlines and these include Borrowing & Lending, Monetary banking services, and Decentralized Marketplaces. The decentralized marketplaces are one of the most rapidly growing sectors among the three with borrowing and lending coming in second.

There are a variety of decentralized exchanges (DEXes) that have been developed, which are Defi applications that allow users to trade cryptocurrencies (commonly referred to as digital assets) without the need of an intermediary holding their funds (or digital assets).  Since the DEXes require very little maintenance and do not include fees for intermediary services, they have comparably lower trading fees compared to the centralized exchanges.

Top decentralized exchanges

The top decentralized exchanges include:

  1. KingSwap
  2. Bancor
  3. Binance DEX
  4. Uniswap
  5. Curve.

KingSwap, which forked from Uniswap protocol, is viewed as the best due to its additional features like liquidity pool migration, and off-ramp fiat conversion enhancements that allow greater user experience and convenience when swapping between cryptocurrency and fiat currencies. The protocol also has new blockchain community-oriented features like pool rewards and network features that offer user-friendly real-time benefits in form of contributor rewards and price curves.

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