# Defi; The Decentralized Finance

Decentralized finance (Defi) is an emerging financial technology based on secured distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services. It offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts, this is accomplished through peer-to-peer financial networks that use security protocols, connectivity, software, and hardware advancements.

Defi uses emerging technology to remove third parties in financial transactions. The components of Defi are stablecoins, software, and hardware that enables the development of applications. The infrastructure for Defi and its regulation are still under development and debate.

In centralized finance, your money is held by banks and corporations whose overarching goal is to make money. The financial system is full of third parties who facilitate money movement between parties, with each one charging fees for using their services. For example, say you purchase some groceries using your credit card. The charge goes from the merchant to an acquiring bank, which forwards the card details to the credit card network.

The network clears the charge and requests a payment from your bank. Your bank approves the charge and sends the approval to the network, through the acquiring bank, back to the merchant. Each entity in the chain receives payment for its services, generally because merchants must pay for your ability to use credit and debit cards.

All other financial transactions cost money; loan applications can take days to be approved; you might not be able to use a bank’s services if you’re traveling.

Decentralized finance uses the blockchain technology that cryptocurrencies use. A blockchain is a distributed and secured database or ledger. Applications called dApps (Decentralized apps) are used to handle transactions and run the blockchain. Blockchain transactions are recorded in blocks and are verified by other users. If these verifiers agree on a transaction, the block is closed and encrypted; another block is created that has information about the previous block within it.

The blocks are “chained” together through the information in each proceeding block, giving it the name blockchain. Information in previous blocks cannot be changed without affecting the following blocks, so there is no way to alter a blockchain. This concept, along with other security protocols, provides the secure nature of a blockchain. Peer-to-peer (P2P) financial transactions are one of the core premises behind Defi. A P2P Defi transaction is where two parties agree to exchange cryptocurrency for goods or services without a third party involved.

We know decentralized digital currencies such as cryptocurrency are not meant to be controlled or overseen by an organization right? that brings us to the discussion of CEX and DEX.

CEX (Centralized exchange) while DEX (Decentralized Exchange), although we are trying to practice decentralized finance, there are still ways in which centralization has had a bit of space to get into the practice, explaining this context is simply when an individual wants to send and receive a digital currency, he would need an exchange platform to do so, this platforms or apps are divided into CEX and DEX.

An example of CEX (Centralized exchange) is Binance which is owned and all transactions are monitored, it also has the right to block or freeze an account or wallet, which there is no different from our commercial banks, whereas DEX is built on “smart contract”. A smart contract is a set of codes or programs that runs on the blockchain, there is no one in control because every transaction about to be made by any user will be completed by this set of codes, the codes are built and maintained by the blockchain.

So transactions don’t need verification from anyone and users can make transactions of any amount of digit currency they desire.

Hopefully, we would move into an era of total decentralization

### **Opportunities in Defi**

Buying and holding a digital asset and then selling it later when its price has gone up to have a good profit is one way to earn from Defi

But let us look at other methods or opportunities;

1. **Defi Staking:** Staking is simply depositing your coins to make a reward over time which turns into a return of investment on the initial amount you deposited. It refers to the practice of locking crypto assets into a smart contract in exchange for becoming a validator in a Defi protocol or a Layer 1 blockchain and earning rewards for performing the duties the role requires. As mentioned above, the purest form of staking involves locking a number of crypto assets to become a validator in a Proof-of-Stake (PoS) blockchain network. Before we go further I did like to explain what PoS (Proof of Stake) is;
    
    **PoS (Proof of Stake):** PoS is a consensus mechanism for processing transactions and creating new blocks in a blockchain. A consensus mechanism is a method for validating entries into a distributed database and keeping the database secure. PoS was created to be a second option to PoW (Proof of Work) because it is easier and more secure, Unlike Proof of Work consensus algorithms, where ensuring transaction validity requires a lot of energy-intensive computational work, PoS relies on validators that have vested interest in the success of a network through their staked crypto assets. In other words, validators have to perform their duties diligently, otherwise, they face the risk of losing a portion or even the entirety of their stakes.
    

So it works when a coin owner stakes their coins for a chance to validate blocks, coin owners with staked coins are known as “validators”. To become a validator a coin owner must stake a specific amount of coin, for instance, an Ethereum owner would need to stake at least 32 Eth to be a validator. While some potential investors can’t afford to stake such an amount of Ethereum, Fortunately, there has been an emergence of staking service providers that allow people to circumvent the steep financial requirement. First, we have the so-called staking pools, which allow people to join forces with other crypto investors to raise staking capital. The system enables people to deposit any amount of tokens to a staking pool and start earning passive income based on how much of the pool’s total holdings their deposit accounts for. As there are advantages to a thing so are their disadvantages and Defi Staking is no different, this Defi activity is affected by gas price hikes because of its scalability problems associated with the current generation of layer 1 Blockchain, particularly Ethereum which is one of the most used cryptocurrencies on Defi staking. The hopes of finding a viable solution to the problem lie with Ethereum 2.0 which has been planned to have a lower gas fee. In addition, the price-adjusting algorithms of liquidity pools are only concerned with maintaining a balance between the values of the assets within a pool, the same tokens can have different values within and outside of a liquidity pool. Because of this, taking your tokens out of a pool comes at a loss that will not be recovered, this is called impermanent loss. It only becomes permanent when the token has been taken out of the pool.

Alternatively, users can also turn to a crypto exchange, since most major centralized and decentralized exchanges offer Defi staking services.

1. **Yield Farming:** Yield farming refers to the practice of moving crypto assets between multiple Defi staking platforms to maximize profits. Essentially, people make their assets available to a liquidity pool. They earn passive income in the form of interest and a percentage of the revenue generated by their platform of choice. However, they can easily redirect their assets to other pools and platforms to chase more lucrative rates of return.
    
2. **Liquidity mining:** Liquidity mining is a subcategory of yield farming that involves providing crypto assets to liquidity pools. These pools are crucial for enabling trading without intermediaries on the type of decentralized crypto exchange (DEX) known as an auto market maker (AMM). This means that the pool dynamically adjusts the prices of the assets to account for any changes in their respective values that might have occurred as a result of trades. At its core, this whole system relies on liquidity providers who make their assets available to liquidity pools. For that, liquidity providers can receive various financial incentives, including a percentage of the fees collected by the pool. Some Defi staking platforms also include their tokens in their reward programs. Defi protocols need to have robust reward programs to make staking economically viable for liquidity providers.
    

Apart from investment opportunities Defi also provides job opportunities for blockchain developers, smart Contract engineering, web/app/software developer, and Defi analysts.

The issues discussed above reflect the fact that Defi is still a novel concept that needs to be further developed. There are still issues that need to be worked on to make it more acceptable to the public, it has shown a great deal of growth and improvement over the years and has proven to be a lucrative means for financial activities to take place while also being a profitable source of income.