DeFi, or decentralized finance is an alternative to traditional “centralized” finance, the system which we’ve always used and in which there is a central authority controlling all the money.

Central banks and governments don’t really advertise the fact that can print more money, stop you from borrowing it, and even stop you from having a bank account altogether.

But they can.

Regardless, their system is built on trust and, well, high rates.

Decentralized finance, on the other hand, came up as the alternative to the traditional system as there are no banks, no human error, but only code.

It is built on three main things: Cryptography, The Blockchain Technology, and Smart Contracts.

Since they are pieces of code open to anyone, they don’t really require you to trust them, as you can read through them and verify all the details.

Moreover, they are censorship resistant and much, much cheaper than any option traditional finance could possibly provide.

1. Stablecoins

Stablecoins, in a way, act as the bridge between Centralized Finance and Decentralized Finance as they are cryptocurrencies which are pegged to a real-world asset (such as Tether, USD Coin and the US Dollar).

These work as a reliable way to buy and sell certain coins without actually having to buy and sell them.

Instead, we can just trade them and thus avoid three major upsets:

·Fees: by selling your coins at a centralized exchange they will take their cut

·Taxes: the IRS will know you’ve made gains selling your coins

·Long waiting periods: the money needs to be wired to your bank and the transaction needs to clear.

This is especially beneficial if you plan to trade several different coins as if one uses a stablecoin , he or she can simply trade his or her coins for a stablecoin and hold them until his next play.

And since everything is coded, away from people’s interference, your money will be safe, unlike money parked in central exchanges (especially those which have been hacked before).

Moreover, by being in the crypto sphere without using a traditional bank, you will be free from limits imposed on how much money you can move around.

To put things in perspective, transfers made in certain countries will sometimes need to be vetted and approved by a bank, whereas when dealing with crypto, one can move millions without anyone’s interference and with the added bonus of having the lowest possible fees out there.

2. Borrowing and Lending

Borrowing and lending money makes up for a very big part of our financial world. In that regard, it makes perfect sense for decentralized finance to take the same route (and make it better).

When dealing with traditional banks, collateral is put down and there are other legal consequences for those who do not pay back what they owe.

This all changes when dealing with crypto as anonymity is a big feature in the crypto universe. As such, putting down 20% of the loan and running away with the money could be a serious issue.

To keep this from happening, smart contracts are employed between people who wish to earn interest and the ones who wish to borrow money.

However, the current borrowing and lending system is heavily focused on the crypto universe as, to request a loan you must overcollateralize it, meaning that you will already need to have the money you’ll be receiving.

Albeit confusing to newcomers, this system is very practical as you can park some of your coins, play around with some money, return it, and get your original coins back, hopefully with a higher price tag on them.

To that extent, flash loans, a loan which only lasts a few seconds, have also been created.

3. Decentralized Exchanges (DEXs)

A decentralized exchange allows users to exchange coins and tokens for other coins and tokens on a very, very low fee which averages out at 0.5%.

Most popular DEXs work in a way which investors can pool their money together and then traders can trade that money.

The fee goes to the investors and there are reportedly billions of dollars locked up in these liquidity pools.

4. Margin Trading

Margin trading works as a loan which will automatically sell your stock if it goes below your down payment.

In centralized finance, to trade on margin, you will require to provide identification, a minimum of a few thousand dollars, and will be met with high fees.

Margin trading on decentralized finance, however, is open to anyone in the world, is a lot quicker, and it is a lot safer as well.

Wrapping up

Decentralized Finance will take the world by storm. Consequently, we highly encourage you to go ahead and try it.

And you if think the concept is too “out there”, we leave you with a Jon Krakauer quote. As the author of Into the Wild has once put it:

“Make a radical change in your lifestyle and begin to boldly do things which you may previously never have thought of doing, or been too hesitant to attempt. So many people live within unhappy circumstances and yet will not take the initiative to change their situation because they are conditioned to a life of security, conformity, and conservation, all of which may appear to give one peace of mind, but in reality nothing is more damaging to the adventurous spirit within a man than a secure future. The very basic core of a man's living spirit is his passion for adventure. The joy of life comes from our encounters with new experiences, and hence there is no greater joy than to have an endlessly changing horizon, for each day to have a new and different sun. If you want to get more out of life, you must lose your inclination for monotonous security and adopt a helter-skelter style of life that will at first appear to you to be crazy. But once you become accustomed to such a life you will see its full meaning and its incredible beauty.”