DeFi for Dummies — Part 1 of 1

De-fi came into existence because-

  1. People thought the banking & financial system should also be decentralized.
  2. People wanted to be their own bank.
  3. People wanted to have control over their money.

WHAT DO BANKS DO?

Banks are mainly used for financial transactions since they provide services like lending, sending, receiving, borrowing money etc.

PROS -

  1. Less paperwork, compliances etc
  2. No racism, favoritism etc.
  3. No corruption
  4. Better Liquidity
  5. Less transaction fees unlike paypal etc.
  6. No security measure fees etc
  7. High average returns of 10%-40%
  8. Can control our own money.
  9. Anonymity
  10. Services like Trading, lending, borrowing, insurance, providing liquidity, staking, farming etc are there in DE-FI.

CONS -

  1. Responsibility of managing our own funds
  2. Risk of losing funds to cyber hacks, forever
  3. Nobody’s liable to pay you anything if funds are lost
  4. Have to manage plenty of risks of CE-FI.
  5. No element of trust like provided by banks
  6. Heavy computing required, so high transaction fee over ethereum.
  • Bank account no in CE-FI = Wallet address in DE-FI
  • Netbanking login & password in CE-FI = Seed phrase in DE-FI
  • OTP in CE-FI = Private keys in DE-FI
  1. Poly network had a $610 million hack, thankfully, the hacker returned the money.
  2. $745K Autoshark hack.

Core of DE-FI consists of -

  1. Decentralized exchanges (DEX)
  2. Decentralized apps.
  3. Decentralized protocols.

HOW DO BANKS MAKE MONEY?

Banks make money mainly by borrowing money at a cheaper rate and lending that money at a higher rate.

  1. Banks may face liquidity issues if all lenders come asking to return their money.
  2. Lot of favoritism, corruption and scams are there which happen because of poor decisions made by banks.
  3. Average Interest rate provided= 6%pa, which is even less than inflation.

HOW DE-FI WORKS?

DE-FI works in the same manner as the bank, the only difference is

  • It’s being run with immutable autonomous smart contracts.
  • Transactions are recorded on a digital ledger i.e blockchain.
  • There’s no racism & no credit score/income check before lending money.
  • Y is always greater than X, in order for DE-FI to make profits.
  • DE-FI stores reserve funds in the form of total value locked(TVL) etc to have good liquidity.
  • Liquidity of DE-FI is greater than that of CE-FI.
  • Interest provided by DE-FI is also greater than that of banks i.e 10%-40% on average.
  1. Total value locked (TVL) would increase.
  2. Increase in TVL would increase liquidity.
  3. Increase in liquidity will lower down the fancy interest rates DE-FI offers right now.

STABLECOINS

We can’t use our fiat currency directly on blockchain, so therefore stablecoins were created.

  1. USDT- Ethereum chain
  2. BUSD= Binance smart chain
  3. UST= Luna Network
  4. FUSDT= Fantom chain

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