DeFi 101: Everything A Beginner Needs To Know About Finance 3.0

Decentralized finance, or DeFi, is the latest innovation in crypto. 

The protocol has gained popularity in 2020 as projects like Yearn.Finance, Compound, and Maker use the Ethereum blockchain to enable a new breed of financial services — a ‘Finance 3.0’ if you will

Still, for many, it’s proven challenging to get an answer to the most simple of questions, including:

  • What is DeFi?
  • How does the protocol work?
  • What are its benefits?

Today, we’ll take you on a whistle-stop tour of the protocol so that by the end of this article, you’ll know everything you need to know about DeFi.

Ready? …Let’s go.

What Is DeFi?

DeFi stands for ‘Decentralized Finance.’ It’s a catch-all term for specific decentralized applications (dApps) built on the blockchain.

These dApps seek to disrupt traditional finance by replicating the services but in a decentralized way — with the setup enabling more evolved financial ecosystems by cutting the middlemen out of a host of transactions.

If we step back and think of Bitcoin: the cryptocurrency allows you to pay for something like a pizza without relying on a bank to process the transaction. If we shift the concept to DeFi: the dApps work in a similar way but extend beyond basic value transfer.

DeFi dApps open new channels, like credit markets and loans, by allowing people to borrow money from other people without ever talking to a bank.

How Does DeFi Work?

Most DeFi dApps rely on Ethereum: the world’s second-largest blockchain platform and leading smart contract operator.

Ethereum smart contracts execute based on predefined conditions, allowing dApp developers to create flexible financial services entirely in computer code. The way a dApp works will depend on the use case in question. But to help you get a handle on things, let’s look at the most popular ones:

  • Decentralized Exchanges: DEXs connect users directly, enabling trading without the need for a central exchange.
  • Lending Platforms: These use smart contracts to eliminate banks from the lending process.
  • Yield Farming: A risk-on strategy in which users scan DeFi tokens in search of outsized returns.

These are just a handful of the possible use cases for DeFi, but the benefits are many — so let’s now turn to them.

What Are The Benefits Of DeFi?

The decentralized nature of the applications means they make financial services available to the masses. No waiting for a bank manager to approve a loan application: just meet the conditions of a smart contract, and you’re off.

If you’re an Elitium client, you may already be using Stable Savings: our DeFi savings account. Stable Savings benefits from the flash-loans protocol to enable Elitium clients to earn a fixed interest rate on USD, GBP, and EUR in a zero-volatility account.

Stable Savings can pay a fixed interest because the platform essentially lends your idle crypto funds to borrowers. And the borrower pays you a fixed interest in return.

It’s a new way to earn fixed-interest when few institutions offer any.

What’s With The ‘DeFi Hype’?

For many, DeFi marks the dawn of Finance 3.0. An era of globally accessible, fair financial products. 

It promises to impact everyone’s future economic life significantly; it may even push traditional banks into the background.

And for many, the DeFi hype has only just begun.

Neo Founder Da Hongfei believes DeFi has achieved more in a few years than banking has in centuries, showing excitement for the “lending and borrowing, decentralized exchanges, insurance and all kinds of derivatives,” which he sees as ‘on the rise’ in DeFi.

Binance is considering an in-house dApp: an interoperable, full-stack DeFi protocol built on the Neo blockchain, called Flamingo, which will allow users to participate as traders, stakers, and liquidity providers.

And Elitium is using DeFi to great effect, as exemplified by Stable Savings and other soon-to-launch products. As our CEO Raoul Milhado recently said, ‘DeFi is the next evolution of the financial system.’

Every statistic points in the same direction: DeFi is here to stay, with transaction and miner revenues continuing to soar.

Get involved in DeFi: sign up to Elitium today.