Decentralized finance, or DeFi (decentralized finance), represents a major change in the world of financial services. Unlike traditional systems based on centralized intermediaries such as banks, the DeFi works in a completely decentralized way, using blockchain technology to offer financial services accessible to all, without geographic restrictions. From a practical point of view, what are the main advantages of the DeFi ? This article immerses you in the heart of the DeFi , by exploring its bases, its components, its advantages, its risks, as well as its future potential.
Table of contents
What is the DeFi ? What are its main advantages?
The DeFi encompasses a wide range of financial products and services that operate on public blockchains , mainly Ethereum . These services include savings, loans, insurance, trading , and much more. The main advantage of the DeFi is that it eliminates the need for intermediaries, which reduces costs and increases transparency. In addition, the DeFi allows anyone with an internet connection to access these services, thus offering global financial inclusion.
How does DeFi work?
DeFi protocols are based on smart contract , self -executable programs on blockchain. These contracts replace traditional intermediaries by automating transactions and ensuring that they are only carried out when certain conditions are met.
For example, a loan contract can be automatically executed when the reimbursement conditions are satisfied, without human intervention. Oracles play an essential role in this process by providing the external data necessary for the smart contract verify whether the conditions are met. For example, an oracle can transmit the current prices of cryptocurrencies, interest rates or other information in real time, allowing the contract to perform only when the predefined criteria are achieved.
The main components of the DeFi
Decentralized exchanges (Dexs)
Decentralized, or Dexs exchanges , allow users to exchange cryptocurrencies directly, without the need for a centralized platform like Binance or Coinbase . Popular examples include Uniswap , Sushiwap, Drift or DYDX . These Dexs work thanks to liquidity pools , where users deposit their assets to facilitate exchanges, in exchange for transaction costs.
Dex Agregators such as 1inch are looking for the best prices among different Dex.
Yield farming and liquidity mining
Yield farming and liquidity mining are two common strategies to generate passive income in the DeFi .
Yield Farming : This practice is to provide liquidity to a DeFi in exchange for yields. Users often seek to optimize these yields through complex strategies, such as the reinvestment of gains in different liquidity pools to maximize profits. The Yield Farming thus encompasses all the methods aimed at obtaining yield in the DeFi .
Liquidity mining is a specific form of Yield Farming where users are rewarded for providing liquidity to a particular pool. Take a concrete example: if you put a pair of cryptocurrencies, for example ETH/ USDC , in a liquidity pool with a total value of $ 10,000 , you not only earn a share of the transaction costs generated by exchanges in this pool (often around 0.3 % per transaction), but also native tokens of the reward platform. For example, if the platform offers an annual return of 40 % , this means that for an initial deposit of $ 10,000, you could potentially receive $ 4,000 of additional tokens over a year, in addition to gains from transaction costs. These tokens can then be exchanged or reinvested, thus increasing your profits.
Other projects such as Pendle Yield Farming strategies . Pendle is distinguished by its unique approach to the tokenization of future yields.
The project allows users to separate their underlying assets into two distinct parts: the value of the principal (Ownership Token) and the value of future yields (Yield Token). These future yields, called Yield Tokens , can be exchanged on the secondary market, allowing users to monetize their interests in advance or speculate on the future value of yields.
Stuking and Restoking
Stoking is another popular method to generate passive income in the crypto ecosystem . This consists of locking assets on a blockchain to support the network (such as validating transactions) in exchange for awards. Stoking is particularly widespread on blockchains operating with the Proof of Stake (POS) .
Resteking is a popular strategy in the ecosystem of decentralized finance ( DeFi ) which consists in automatically reinvesting the awards obtained via stuking in the same validation or network securing process. By continuously reinvesting the rewards, users can benefit from the effect of the compound interests , which makes it possible to increase their gains over time without having to intervene manually.
DeFi platforms have implemented RESTONING mechanisms to facilitate this process. For example, protocols like Lido or EigenLayer offer liquid storage solutions for blockchains like Ethereum , where users can stake their Eth and receive tokens who represent their ETH stakes (Steth in the case of Lido). With these tokens, users can not only continue to generate yields, but also use these tokens in other DeFi to increase their yields or access liquidity.
Another example is the ANKR , which allows users of Staker several types of tokens and take advantage of the automatic resting function. Ankr also offers derivative tokens (such as AETH) which can be used on other DeFi , allowing users to maximize their yields while remaining flexible with their assets.
Platforms like Yearn Finance or AutofarM go even further by integrating automatic restoking strategies in their boxes (Vaults). Users deposit their tokens in these chests, and the platform is responsible for automatically reinvesting the rewards, thus maximizing profits. For example, on Yearn, when you deposit tokens in a vault, the protocol automates the collection of yields from stuking and reinvested them, which makes it possible to benefit from the effect of the interests made up in the long term without manual intervention.
Decentralized loans and loans
Decentralized loans and loans are one of the pillars of the DeFi . Platforms like Aave and Compound allow users to lend their digital assets from their portfolio in exchange for interest or borrow assets by providing guarantees. These processes are fully automated by smart contract , thus offering total transparency and increased efficiency compared to traditional banking systems.
More information here
The stablecoins
Stablecoin play stablecoin crucial role in the DeFi . These are cryptocurrencies designed to maintain stable value, often indexed to a fiduciary currency like the US dollar. The most used stablecoin USDT , the USDC and the DAI . Stablecoin stablecoin allow users to take advantage of the advantages of cryptocurrency while minimizing the risk of volatility.
The main advantages of the DeFi
The DeFi offers many advantages compared to traditional financial systems:
- Global accessibility : Anyone with an internet connection can access financial services via DeFi , without geographic discrimination.
- Transparency : all transactions are recorded on the blockchain, allowing anyone to check them at any time.
- Total control : Users keep control of their funds permanently, without having to trust a central entity.
The risks associated with the DeFi
However, the DeFi is not without risks:
- Volatility : digital assets are young and therefore still very strongly subject to volatility. High yields are often accompanied by equally high risks.
- Uncertain regulations : DeFi evolves in an still vague regulatory environment, which can cause legal risks for users and developers.
The future of DeFi : towards a generalized adoption?
The DeFi is expanding, and its growing adoption suggests that it could become the norm in the future. This hypothesis becomes all the more plausible if the different platforms continue to simplify their interfaces and make technology more accessible. Indeed, as more and more investors and users adopt the DeFi, the barriers to the entry decrease, making this technology essential for the financial services of tomorrow.
The Tokenomics of the DeFi
The tokens in the field of decentralized finance, such as UNI ( Uniswap ) or COM (Compound), play a central role in the ecosystem. They are often used to govern protocols, allowing tokens holders to vote on proposals for updating or improving the protocol. In addition, these tokens are also used to encourage users to participate in the various services offered by platforms.
Comparison between DeFi and traditional finance
The DeFi is distinguished from traditional finance by several key aspects:
- Decentralization : Unlike banks, the DeFi are not controlled by a single entity.
- Accessibility : DeFi is accessible to everyone, without the need for bank account or complex documentation.
- Rapid innovation DeFi space evolves quickly, with new products and services introduced regularly.
The impact of the DeFi on the global financial market
The impact of the DeFi on the global financial market cannot be underestimated. While more and more capital is flocking in decentralized finance, traditional financial institutions are starting to invest large capital.
Conclusion
DeFi represents a revolution in the world of finance, by redefining the rules and opening the door to a multitude of new possibilities. With its numerous applications, such as stuking, remaining, yield farming, and liquidity mining, it allows everyone to access financial services decentralized, transparent and often more profitable than traditional systems.
However, like any innovation, decentralized finance includes risks, in particular with regard to bugs in smart contractand security -related vulnerabilities. These risks are still present, although the platforms strive to minimize them over time.
The growing adoption of the DeFi shows that it may well become the norm in the near future, provided that platforms continue to improve the accessibility and conviviality of their technologies. This democratization of finance, coupled with the power of blockchain technologies, could well mark the beginning of a new economic era where traditional intermediaries become obsolete. For users, this means new opportunities, but also the need to remain informed and cautious in this constantly evolving ecosystem.
Faq
What is the DeFi ?
- DeFi, or decentralized finance, is an ecosystem of blockchain -based financial services that allows users to borrow, lend, exchange and invest digital assets without traditional intermediaries.
What is the difference between Yield Farming and Liquidity Mining?
- The Yield Farming is to provide liquidity to a DeFi protocol to obtain optimized yields, while liquidity mining is a specific method of Yield Farming where users receive rewards for providing liquidity to pools.
What is stuking and remaining?
- Stoking involves locking crypto assets to support a blockchain network in exchange for awards, while the restking consists in automatically reinvesting these rewards to maximize gains.
What are the risks linked to the DeFi ?
- The risks include bugs in smart contract(although marginal), the volatility of assets, and an uncertain regulatory framework.
Can DeFi become the norm in the future?
- Yes, if the platforms continue to simplify access and use, the DeFi has the potential to become a standard in the global financial sector.
Investments in cryptocurrencies are risky. Crypternon could not be held responsible, directly or indirectly, for any damage or loss caused following the use of a property or service put forward in this article. Investments linked to cryptocurrencies are risky by nature, readers must do their own research before undertaking any action and investing only within the limits of their financial capacities. This article does not constitute an investment advice.
Certain links of this article are affiliated, which means that if you buy a product or register via these links, we will collect a commission from our partner. These commissions do not train any additional cost for you as a user and some even allow promotions.
AMF recommendations. There is no guaranteed high yield, a product with high performance potential implies a high risk. This risk taking must be in line with your project, your investment horizon and your ability to lose part of this savings. Do not invest if you are not ready to lose all or part of your capital .
To go further, read our pages legal notices , confidentiality policy and general conditions of use .
Yohan Uzzan
Training engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future ahead of it, I participate in its democratization by developing Crypternon.
