Detailed explanation of how to DeFi for beginner, Welcome to follow and discuss with us
Author: Lunaray Team
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This is article will write about, from what is DeFi, to how to operate DEX, lending and other protocols, it has a very detailed explanation. It is a very good systematic teaching material for beginners.
0x02 Traditional Financial Institutions
Bank
Banks are giants in the financial industry, facilitating payments, accepting deposits, and extending lines of credit for individuals, businesses, other financial institutions, and even governments. They combined market capitalization of the world’s top 10 banks is $2 trillion. The total market capitalization of the entire cryptocurrency market exceeds $2 trillion in April 2021.
Banks are a vital part of the mobile machine of the financial industry — they move money around the world by providing value transfer services (deposits, withdrawals, transfers), extending lines of credit (loans), etc. However, banks are managed by people and governed by policies and are prone to people-related risks such as mismanagement and corruption.
The 2008 global financial crisis was the epitome of excessive risk-taking by banks, and governments were forced into massive bailouts. The crisis exposed the flaws of the traditional financial system and revealed the need to revampit.
DeFi seeks to use the Internet and blockchain technology to transform three key functions of banks in the entire financial ecosystem: 1. Payment and settlement system (remittance) 2. Inclusiveness (accessibility) 3. Centralization and transparency
- Payment and settlement system
If you’ve ever tried to send money to someone or a business in another country, you’re well aware of the pain — transfers involving banks around the world often take several business days to complete and involve various fees. To make matters worse, there may also be issues with documentation, compliance with anti-money laundering laws, privacy, and more.
For example, let’s say you live in the US and want to send $1000 from your US bank account to your friend’s Australian bank account. This usually involves three fees: your bank’s exchange rate, an outbound fee for international wire transfers, and an inbound fee for international wire transfers. Also, it can take a few business days for the recipient to receive the money, depending on the location of the recipient’s bank.
The cryptocurrencies that power the DeFi movement enable you to bypass intermediaries that take the vast majority of the profits from these transfers. Your transfer will be processed without issue and it will usually be faster too. The fees are relatively low compared to banks. For example, transferring cryptocurrency to any account in the world can take anywhere from 15 seconds to 5 minutes, depending on several factors, along with a small fee.
If you’re reading this article, chances are you already have a bank account and have access to the financial services banks offer — opening savings accounts, loans, investing, etc. Many others, however, were not so lucky, unable to use even the most basic savings account.
The World Bank estimates that 1.7 billion people did not have an account with a financial institution as of 2017, more than half of them from developing countries. They are mainly from poor households and some of the main reasons for being unbanked are poverty, geography and trust issues.
However, the World Bank also estimates that two-thirds of the 1.7 billion unbanked have access to a mobile phone. Thus, with an internet connection, DeFi Dapps can be a conduit for millions of unbanked people to access financial products and conduct financial transactions without going through the lengthy verification process of traditional banks.
DeFi represents a movement aimed at promoting borderless, censorship-free and accessible financial products for all. DeFi protocols are non-discriminatory and provide a level playing field for everyone.
- Centralization and Transparency
There is no denying that traditional, regulated financial institutions that comply with government laws and regulations are the safest places to store funds. But they are not without flaws — even large banks can fail. Washington Mutual, with more than $188 billion in deposits, and Lehman Brothers, with $639 billion in assets, both collapsed in 2008. In the US alone, more than 500 banks have failed. Banks are one of the centralized points of failure in the financial system. The fall of Lehman Brothers triggered the start of the 2008 financial crisis.
Transparency is also relevant — there is no way for the average investor to fully understand the practices of financial institutions. Some of the events that led to the 2008 financial crisis included the AAA rating (the best and safest investment) by credit-rating agencies for high-risk mortgage-backed securities.
DeFi will be different. Most of the DeFi protocols built on public blockchains such as Ethereum are open source for easy auditing and transparency. They often have decentralized management organizations to ensure that everyone knows what’s going on
DeFi protocols are written in lines of code — you can’t cheat the code because it treats every participant equally and without discrimination. The code runs exactly as programmed, and any flaws will quickly become apparent because it’s open for public scrutiny.
Decentralized Finance vs Traditional Finance
Friction, inaccessibility and regulatory uncertainty are some of the main issues plaguing the current banking system. Unfortunately, not everyone is lucky enough to be banked in the current financial system, nor are they able to compete financially on a level playing field.
Such as the conundrum behind the GameStop (GME) deal, a group of small investors decided to buy GME stock because large hedge funds were massively shorting it. Financial apps like Robinhood had to step in and limit GME trading due to “unusual volatility.” Some may take this as a cosmetic phenomenon, while others will note that one of Robinhood’s biggest customers is Citadel LLC. Citadel, a firm that invested in Melvin Capital, lost billions of dollars shorting GME.
The DeFi movement aims to bridge these gaps and allow everyone to access funds without any form of censorship. In short, DeFi opens up a huge window of opportunity, giving users access to a variety of financial instruments regardless of race, religion, age, nationality, or geography.
When comparing traditional and decentralized financial products, each party will have advantages or disadvantages. In the following articles, we’ll walk you through the concepts and possibilities of Decentralized Finance so you can see how to use its best capabilities to solve real-world problems.
In the following articles, we will talk about an overview of DeFi and some decentralized applications to help understand the basic concepts about how DeFi works.
stay tuned with following article .
