Financial institutions have existed for years. They offer different types of products and services, which help us manage money. However, recently there has been a silent revolution taking place where you are in charge of your finances—no more delays, middlemen, and other unnecessary stuff.

This new paradigm is called DeFi, and in this article we will dive into a world where there are unlimited possibilities for growing your net worth. What are DApps? What about smart contracts? Let’s explore. 

Banks remain in the old system, it's time to shape the new one for the better.

What is DeFi?

In simple terms, DeFi stands for decentralized finance. Its goal? To empower individuals and give them back control that has been in the hands of the global financial system for way too long.

It all started with the creation of Bitcoin, which was a response to a then-collapsing financial system. Compared to traditional finance, it’s a much more transparent system thanks to the use of blockchain technology. Another advantage is that it does not rely on banks, which, as we know based on history, are prone to financial crises and failures.

It’s worth mentioning that blockchain, which is not based on trust, laid the foundation for decentralized finance. All transactions are recorded on a public ledger, to which everybody has access, making it possible to spot fraudulent behavior. Thanks to blockchain, we can swap out favorite coins, earn yield, and provide liquidity.

How smart contracts change everything

Smart contracts are what really changed the game. They are parts of code, which are put on the blockchain and executed when certain conditions are met. It’s a trustless and immutable process where code is law. Let’s break it down.

The old system

In the old system, when you felt like selling an apartment, you would need to find a real estate agency, which would then list your property. When the buyer was found, the transaction would proceed, and after signing some papers, the money would be yours minus the cut for the middleman—the real estate agency. Think about the possibility that the aforementioned agency could scam you for money. Unfortunately, this system was designed to have flaws so that banks could profit heavily.

The new system

The new one is permissionless. When you desire to swap your Ethereum for stablecoins, it’s done, provided you have the funds. No questions asked, no delays, no inefficiencies. This is precisely how the system should have worked before.

What can you actually use DeFi for?

With these many choices, you may be left wondering, “What to do with my assets?" Here are the answers you’ve probably been looking for:

Swapping

It’s a straightforward process where you exchange one digital asset for another. All you need to do is input the correct amount and click swap—it’s that simple. Depending on the blockchain you are using, your assets should land in your wallet in seconds or minutes.

Providing liquidity

Have you ever thought about how it’s actually possible to swap one crypto for another? Well, it’s thanks to something called liquidity providing. Basically, a person has to deposit assets to a liquidity pool in an equal proportion (50-50 split). “But why would they do that?” you may ask—a good question. Every time someone exchanges tokens, the liquidity provider gets a small fee, which is added to the pool. Sounds good, right?

Staking

Some apps also offer staking. All you have to do is deposit a certain token, and as a reward, you get paid more of this token. You should always pay attention to lock time periods, as you may need to wait for a really long time to get your money back, and a few % a year isn’t worth it. Not to mention that the price may tank in the meantime!

There's many opportunities in DeFi, but you need to beware of the possible risks.

Real-world DeFi statistics

Ethereum is responsible for over 55% of TVL on DeFi. What does that mean? TVL is an abbreviation for Total Value Locked, which is all the funds that are deposited on various decentralized protocols on the chain.

TVL has grown over 125% this year thanks to the price increase of cryptocurrencies and retail coming back to the market after being burned out in the brutal bear market of 2022.

It’s also crucial to understand that Ethereum’s market share of DeFi has been declining for the past years, mainly due to the adoption of other networks like Solana. In order to stay ahead of the market, you need to adapt and spot trends before anyone else does.

The truth about DeFi revealed

Not everything is as good as it seems. Certain risks exist that need to be said out loud. Although the industry is still in its early stages, addressing these issues can be beneficial in the long run.

Security risks

Security risks are a major concern when it comes to DeFi. Hacks and exploits happen all the time, and astonishing amounts of money are stolen. The safety of assets should be a top priority, because how can a user invest a significant amount of money if they can disappear easily?

Regulatory uncertainty

Regulatory uncertainty is also a thing. Many countries have been cracking down on unregulated DeFi apps. It also raises the question of feasibility when it comes to many of these apps. Will they exist in a few years?

User experience

Despite having more educational materials and awareness, DeFi still remains a complex topic that is majorly misunderstood by non-technical users. In order to get to the point where we achieve mass adoption, we need to make it as easy as clicking a few buttons.

How to get started with DeFi?

To explore the world everyone is talking about these days, you are required to set up a wallet. It’s a place where you can access your cryptocurrencies.

Acquiring some crypto is most likely the next step. For instance, you can use a simple onramp platform like Swapped.com, which supports a variety of payment methods—including bank transfers, credit cards, and even some local ones. Give it a try!

Last but not least, find apps to interact with. On Uniswap you can provide liquidity and swap. Aave, on the other hand, provides you with a possibility to lend money to other network participants.

Humans make mistakes

All of you should understand that blockchain is a technology that enables humans to create—whether it’s a new coin or an app, we are humans, and humans make mistakes. It’s unavoidable to forecast a hack, so never deposit more than you can afford to lose and stick to established names that have been here for years.

The future ahead

The financial world in a few years may change drastically for the better. Once we overcome all these problems mentioned above and innovate, we will be ready to onboard billions of people. Layer 2 solutions are something worth looking into. They offer multiple benefits, mainly scalability improvements and lower fees, which lead to mainstream adoption.

A new era of decentralized finance

Decentralized finance has the potential to reshape the world and the way we manage assets. Everything might change, of course, but if we stay on the right track ahead of us, we may find ourselves in an inclusive financial world accessible to billions.

Think about all of the possibilities these revolutionizing technologies could bring and ask yourself, "Do you want to be part of this movement or not? Early adopters always win, no matter what.