Decentralized Money Markets

Let’s move on to decentralized money markets – services that connect borrowers with lenders.

Compound is an Ethereum based borrowing and lending dapp, meaning you can lend your crypto out and earn interest on it. Alternatively, maybe you need some money to pay the rent or buy groceries, but the only funds you have are cryptocurrencies.

If that’s the case, you can deposit your crypto as collateral and borrow against it.

The Compound platform automatically connects the lenders with borrowers, enforces the terms of the loans, and distributes the interest. The process of earning interest on cryptocurrencies has become extremely popular lately, giving rise to “yield farming”.

A term given to the effort of putting crypto assets to work while seeking to generate the most returns possible. You can look at the description below for some of the more exciting DeFi projects that you can start using today.

So, we have decentralized stablecoins, decentralized exchanges and decentralized money markets.

How about decentralized insurance?

All these new financial products entail some risks which we will cover shortly, so why not create a service that ensures my funds in case something goes wrong?

Well, how about a decentralized platform that connects people who are willing to pay for insurance with people who are willing to insure them for a premium, while everything happens autonomously without any insurance company or agent in the middle.

DeFi services work in conjunction with one another, making it possible to mix and match different services to create new and exciting opportunities. This kind of resembles how you can use different LEGO blocks and get creative with whatever it is you want to build. Hence the term ‘money legos’ has been coined to refer to DeFi services.

For example, you can build the following service from different money legos. You start out by using a decentralized exchange aggregator to find the exchange with the best rate for swapping Ether for DAI. You then select the DEX you want and conduct the trade. Then you lend the DAI you received to borrowers to earn interest. Finally, you can add insurance to this process to make sure you’re covered in case anything goes wrong. That’s just one example out of the many opportunities DeFi offers.

By now you can probably imagine what advantages DeFi presents such as Transparency, interoperability, decentralization, free for all services and flexible user experience, to name just a few.

However, there are also some risks you should be aware of. The most important risk is that DeFi is still in its infancy.

Decentralized Finance (DeFi) Risks

This means that things can go wrong.

Smart contracts have had issues in the past where people didn’t define the rules for certain services correctly and hackers found creative ways to exploit existing loopholes to steal money. If you decide to test out any of the existing DeFi services, make sure to do it with an amount of money you can afford to lose in case anything goes wrong.

Additionally, you should remember that a system is decentralized only as its most central component. This means that some services may be only partially decentralized while keeping some centralized aspects that can act as an Achilles heel. It’s important to understand exactly how a product or service works before investing in it, so you can be aware of any issues that may come up.

To sum it up, it seems that the DeFi revolution has reached its early adopter stage and the coming years will tell if it manages to cross the chasm into mainstream adoption. There’s no doubt that a decentralized financial system can benefit a huge portion of the population that currently suffers from financial discrimination, high fees, and inefficiencies in managing their funds.

Hopefully by now you understand what DeFi is – a term given for a variety of decentralized financial services that aim to replace our current centralized financial system (Description of DeFi available in — post).