Guide to DeFi

What Is DeFi?

Decentralized finance (DeFi) refers to a blockchain-based financial ecosystem that operates independently of traditional, centralized financial institutions. DeFi enables users to engage in various financial transactions such as lending, borrowing, earning interest, and trading digital assets without the involvement of intermediaries.

Unlike traditional finance, which relies on a centralized system to manage and verify financial transactions, DeFi leverages blockchain technology and smart contracts to facilitate peer-to-peer transactions. 

As of 6 September 2024, the total value locked (TVL) in DeFi protocols, a measure of the crypto assets deposited in DeFi applications is $78.611 billion, with Ethereum taking up 56.72% of the TVL of all chains.

How Does DeFi Work?

DeFi operates on a network of interconnected protocols and decentralized apps (dApps) built on a blockchain. These dApps interact with smart contracts, self-executing contracts with the terms of the agreement directly written into lines of code, to automate and facilitate various financial transactions.

Key Components in DeFi:

• Blockchain: The underlying technology that provides a secure and transparent ledger for recording all transactions.

• Smart Contracts: Self-executing contracts that automate the execution of financial agreements.

• Decentralized Apps (dApps): User interfaces that allow individuals to interact with DeFi protocols and smart contracts.

• Digital Wallets: Secure storage solutions for holding crypto assets and private keys (unique, complex codes that act as your digital signature, granting you ownership and control over your crypto assets)

• Oracles: Data feeds that provide real-world information to smart contracts.

Why Is DeFi Important?

DeFi's importance lies in its ability to address current limitations and inefficiencies in the traditional financial system, providing tangible benefits for individuals and institutions. These benefits include greater financial inclusion, reduced cost of transactions, and greater transparency over financial processes. DeFi is actively reshaping finance via these features: 

• Permissionless and Inclusive: DeFi removes barriers to entry, allowing anyone with an internet connection to participate in the financial ecosystem, making it inclusive for the underserved and unbanked.

• Transparency and Auditability: The inherent transparency of blockchain technology ensures that all financial transactions are publicly verifiable, promoting trust and accountability within the DeFi ecosystem.

• Enhanced Security and Control: By leveraging smart contracts and decentralized networks, DeFi minimizes the risk of censorship, fraud, and single points of failure. Users retain full control over their private keys and digital assets, unlike in traditional finance where control is often ceded to institutions.

• Efficiency and Cost-Effectiveness: DeFi transactions are often faster and cheaper than traditional financial transactions due to the elimination of intermediaries and the automation enabled by smart contracts.

• Innovation and Flexibility: The open and composable nature of DeFi encourages innovation and experimentation, leading to the development of new financial products and services that cater to a wider range of needs.

Use Cases of DeFi

The versatility of DeFi is reflected in its wide array of applications, transforming how we interact with financial services. Let's explore some of the prominent use cases:

• Decentralized Exchanges (DEXs): DEXs enable peer-to-peer trading of crypto assets without relying on centralized intermediaries, facilitating greater control, transparency, and accessibility for traders.

• Lending & Borrowing: DeFi lending platforms allow users to lend their crypto assets and earn interest or borrow assets by providing collateral, governed by smart contracts for automation and transparency.

• Yield Farming: Yield farming utilizes various DeFi protocols to maximize returns on crypto assets, typically involving providing liquidity to decentralized exchanges or participating in lending and borrowing platforms to earn interest on their deposited or staked assets.

• Stablecoins: These are crypto assets pegged to the value of fiat currencies, offering stability and mitigating volatility within the DeFi ecosystem, widely used for trading, lending, and as a store of value.

• Derivatives: DeFi enables the creation and trading of derivatives, financial instruments that derive their value from an underlying asset, enabling sophisticated trading strategies such as leveraged trading, arbitrage and synthetic assets. At the same time, traders can also use derivatives to facilitate risk management of their portfolio via hedging or via instruments like futures or options contracts. 

• Margin Trading: DeFi platforms enable users to borrow funds to amplify their trading positions, increasing potential profits but also heightening the risk of losses.

• Insurance: DeFi insurance protocols provide coverage against smart contract risks, hacks, and other potential losses within the DeFi ecosystem.

• Multi-Chain Bridges: These bridges enable the transfer of assets between different blockchains, enhancing interoperability and expanding the reach of DeFi applications.

• NFTs: Non-fungible tokens (NFTs) represent unique digital assets, such as digital art, trading cards, virtual pets, exclusive music tracks, in-game items and more. DeFi platforms facilitate the creation, trading, and lending of NFTs, opening up new possibilities for digital ownership and investment.

• Decentralized Autonomous Organizations (DAOs): DAOs are community-governed entities that utilize smart contracts to manage and make decisions. They are often used to govern DeFi protocols and manage shared resources.

Why Trade DeFi Cryptocurrencies?

Let's explore some of the reasons for and against trading DeFi crypto assets:

Reasons to Trade DeFi Cryptocurrencies

• Access to Unique Assets: DeFi applications and decentralized exchanges often offer access to a diverse range of crypto assets and investment opportunities that may not be available through traditional financial channels.

• Innovation and Growth: The DeFi space is rapidly evolving, with new projects and tokens emerging regularly, potentially offering early investment opportunities.

• Participation in the DeFi Ecosystem: Trading DeFi cryptocurrencies allows you to actively engage with and contribute to the growth of the DeFi ecosystem.

Reasons to be Cautious about Trading DeFi Cryptocurrencies

• High Volatility: The DeFi market is highly volatile, meaning prices can fluctuate dramatically, potentially leading to substantial losses.

• Smart Contract Risks: Bugs or vulnerabilities in smart contracts can lead to exploits and financial losses.

• Regulatory Uncertainty: The regulatory landscape for DeFi is still evolving, creating uncertainty and potential risks for traders.

• Complexity: DeFi can be complex and challenging for newcomers to understand, requiring careful research and due diligence.

Top 3 DeFi Cryptocurrencies

The DeFi ecosystem is home to numerous cryptocurrencies that power various protocols and applications. Let's take a closer look at three notable DeFi cryptocurrencies available on Flipster: Jupiter (JUP), Aave (AAVE), and Jito (JTO).

Flipster makes it easy to access the DeFi market. Discover and trade a variety of DeFi cryptocurrencies directly through our app.

How to Trade DeFi Cryptocurrencies on Flipster?

1. Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).

2. Click [Trade] tab.

3. Search for JUP, AAVE, or JTO, and click on it.

4. Select the leverage (up to 100x).

5. Select either a Trigger Order or Market Order.

6. Input the amount of crypto you wish to trade, or select a percentage of your available funds to use.

7. Once you have confirmed the details, click the [Long] or [Short] button to open a position.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.