The world of finance stands at a time when decentralization and transparency are becoming the new norm among the masses. From enabling undisputed regulatory scrutiny to amassing trust among all the stakeholders, decentralized finance changed the long-lasting nature of finance.
These developments are being adopted with the expansion of blockchain technology and its emerging use cases. DeFi platforms, known for their decentralized nature and lack of intermediary authority, are enabling the development of a new financial ecosystem. Amid hundreds of platforms present on the web, some stand out apart from other.
DeFi is a financial technology based on secure distributed ledgers, similar to those used by cryptocurrencies. Unlike the traditional financial system where centralized institutions like banks and brokerages are governed by entities such as the Federal Reserve and the Securities and Exchange Commission (SEC), DeFi operates on the consensus of the participating entities only.
DeFi platforms allow individuals to access peer-to-peer digital exchanges, eliminating the fees typically charged by banks and other centralized crypto institutions. With DeFi, users can hold money in a secure digital wallet, allowing for quick fund transfers to anyone with an internet connection in the world.
However, DeFi platforms are not the most easy to get your hands on and you have to ensure multiple security practices to safeguard your assets.
But when they are not the most user-friendly platforms out there, why should one choose them? Well, this is one of the most common questions among DeFi beginners. Here are the reasons to answer this question:
Open and Global Financial System: DeFi offers an open and global financial system that is built for the internet age. Unlike traditional financial systems that can be opaque and tightly controlled, DeFi provides transparency, control, and visibility over your money.
Accessibility and Autonomy: DeFi platforms are accessible to anyone with an internet connection, eliminating the need for centralized authorities or intermediaries. This means that there are no restrictions or barriers to entry, and users have complete control over their funds.
Financial Products: DeFi platforms offer a wide range of financial products and services that go beyond traditional offerings. For example, users can lend or borrow funds without the need for personal identification, earn interest on their crypto assets, and even participate in no-loss lotteries.
Uniswap is a decentralized exchange (DEX) protocol built on the Ethereum blockchain. Unlike traditional exchanges, which rely on order books to match buyers and sellers, Uniswap uses an innovative model known as automated liquidity provision.
The purpose of Uniswap is to create a decentralized platform where anyone can trade ERC20 tokens directly from their wallets without the need for an intermediary.
Features
Uniswap's swap feature allows users to exchange one type of cryptocurrency token for another
Uniswap has also introduced support for Non-Fungible Tokens (NFTs), allowing users to trade NFTs directly on the platform.
Uniswap's "Pools and Earn" feature allows users to deposit their tokens into a shared pool and earn in exchange for providing liquidity.
You can also purchase crypto directly on the Uniswap Web App using a credit card, debit card, or bank transfer.
Cons
The gas fees on Uniswap can be high, especially during peak times.
The platform might be complicated for beginners to understand and navigate.
MakerDAO is based on Ethereum blockchain that offers a two-token system: DAI (a stablecoin) and MKR (a governance token). It allows users to generate DAI by locking up collateral assets, primarily Ethereum.
The platform aims to bring stability to the cryptocurrency market with DAI, which is pegged to the US dollar. MakerDAO's governance system enables MKR token holders to make decisions about the protocol, ensuring its stability and efficiency.
Features
Decentralized stablecoin (DAI) generation
Collateral-backed loans
Governance system with MKR tokens
Transparent and trustless financial applications
Permissionless borrowing marketplace
Cons
Complexity for new users
Dependence on Ethereum's performance and scalability
Compound is a platform also built for the Ethereum blockchain that allows users to lend and borrow assets. Users can earn interest on the assets they supply to the platform and borrow against their supplied assets.
The platform uses a set of smart contracts to automate these transactions, eliminating the need for intermediaries. Compound introduces a unique model where interest rates are algorithmically determined based on supply and demand, ensuring efficient and transparent financial operations.
Features
Algorithmically determined interest rates
Supports multiple crypto assets for lending and borrowing
Transparent and trustless operations through smart contracts
Governance system with COMP tokens
Liquidation process to ensure the system's solvency
Cons
Complexity for newcomers to the DeFi space
Dependence on the Ethereum network's performance
SushiSwap started as a fork of the popular Uniswap protocol but has since introduced unique features and a community-driven approach. SushiSwap allows users to swap, earn, lend, borrow, and leverage their assets.
It uses an automated market maker (AMM) model, where liquidity providers deposit their tokens into pools, and traders can swap between tokens in these pools. The platform is governed by its native token, SUSHI, which gives holders voting rights on protocol decisions.
Features
Decentralized token swapping
Liquidity provision with rewards
Yield farming opportunities
Onsen and BentoBox lending/borrowing solutions
Community-driven governance with SUSHI tokens
Cons
High competition with other established DeX
PancakeSwap is a decentralized exchange (DEX) built on the Binance Smart Chain (BSC). It has gained popularity due to its low transaction fees compared to Ethereum-based DEXs by using BSC. PancakeSwap also uses an automated market maker (AMM) model, allowing users to trade digital assets without relying on traditional order books.
Liquidity providers can deposit their tokens into pools and earn fees from trades. The platform also offers yield farming, staking, and lottery features. PancakeSwap's native token, CAKE, is used for governance and staking.
Features
Fast and low-cost transactions on Binance Smart Chain
Yield farming and staking opportunities
Lottery system with CAKE token rewards
NFT trading and collectibles
Community-driven governance with CAKE tokens
Cons
Reliance on the security of the Binance Smart Chain which is the native blockchain of Binance centralized exchange
Despite knowing the mechanism behind DeFi platforms and choosing the best one for your needs, there are a few things that you must know while transacting on a DeFi platform. Here are some of those things that you should keep in mind:
On DeFi platforms you do not have a customer hotline nor a fund recovery mechanism in case of a wrong transaction.
DeFi platforms, like any other software, can be vulnerable to online hacking. Knowing your risk and adding multiple checkpoints to your crypto wallet is a must.
If you are taking a loan on DeFi, most lending transactions will require collateral, often equal to or exceeding the value of the loan. This can limit who can access certain types of DeFi loans.
Securing your wallets is crucial in DeFi. Wallets are protected by private keys, which are unique codes known only to the owner.
While using DeFi platforms, it is essential to stay updated on any regulatory changes and understand the potential risks involved.
Decentralized finance is here to stay and its use cases are already being adopted on both retail and organizational level. The platforms mentioned above are market leaders and will get more popular in the coming years as decentralized finance reaches the last man in the queue.
Also Read: BRC 20 Token: The Changing Face of Bitcoin Ecosystem
