Getting Started in DeFi - Part 4

Updated: Jan 2

What is DeFi

By now you'd likely have either read about or heard of DeFi but it's still quite new to many. There's going to be a need to understand it though, especially as we're seeing so much movement happening in how finance and transaction are transforming. Whilst it may seem thats its just bitcoin and NFT's (non-fungible tokens which saw assets like NBA Top Shot sweep across the world), there are far more use cases that are out there and more being built as we speak.

After understanding smart contracts, Finematics has another video (below) diving into what DeFi is and the different types of DeFi categories out there (as well as some of the foundational protocols that are the building blocks of the whole movement).

As Finematics puts it:

"DeFi is trying to create the new financial system in a permissionless and open way"

The categories covered in this video include the following which Finematics explains at a high level:

  • Decentralised Exchanges (DEX)

  • Lending and Borrowing

  • Stable Coins

  • Derivatives

  • Margin Trading

  • Insurance

In addition to these categories, there are systems called Oracles that provide data from outside the blockchain back into the protocol. These are needed depending on what the protocol does. If its a a derivative type then it may need prices of real-world assets in order to trigger smart contract events.

More of these kinds of new protocols are being created and it shows how traditional world finance can be moved ot this new world of DeFi.

The comparison between centralised finance (CeFi) and decentralised finance (DeFi) is highlighted too:

Whilst DeFi provides solutions to problems with centralised finance, it does not come witout its own risks. Errors include the potential for hacking as well as software bugs. This has led to issues with money being lost and subsequently required rule changes and and system improvements to occur post event but this is the case with most new systems as they are being built.

Whilst risk can detract usage, when issues do occur it is also a catalyst to improve how the DeFi market operates. The space is continuing to evolve to plug those gaps and fix any issues that come up. The future is going to see a lot more traditional ways of doing business start to change and we're lucky we get to witness these events happening real-time.

The Full Series

Part 1 - Where to Read, Watch, Listen

Part 2 - What is the blockchain and how does mining work?

Part 3 - What are smart contracts?

Part 4 - What is DeFi? - This video

Part 5 - What is Yield Farming?

Part 6 - What are Liquidity Pools?

Part 7 - Risks and Impermanent Loss

Part 8 - Tools and data to analyse tokens/cryptos

Part 9 - How to avoid scams?

Part 10 - Protocol types

Part 11 - What's on the horizon - the metaverse, DeFi 2.0

Part 12 - What is a DAO?


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