Learn everything you need about decentralized finance with this ultimate guide by DappRadar.
Blockchain technology has opened the door to a new world of opportunity for decentralized finance and personal banking. Now, instead of letting banks make the rules, users control their finances and can reap the rewards for doing so.
With all this new technology innovating and changing so quickly, it’s only natural that people have questions. Fortunately, DappRadar has you covered.
- What is Decentralized Finance (DeFi)?
- Why are people using DeFi?
- Where do decentralized exchanges get their money reserves?
- Best DeFi dapps
- Best DeFi tokens
- What are liquidity pools?
- Understanding liquidity providers
- Making sense of DeFi wallets
- Know your stablecoins
- Why do you pay a fee to swap tokens on a decentralized exchange?
- Why are there so many decentralized exchanges?
- How to make money in DeFi?
- What is DeFi staking?
- What is yield farming?
- Lending money in DeFi
- Borrowing money in DeFi
- Staying safe in DeFi
- What content does DappRadar have specifically about DeFi?
What is Decentralized Finance?
DeFi or decentralized finance is an overarching phrase for financial services operating on public blockchains. In DeFi, you can do almost everything traditional banks support but faster.
This includes earning interest, borrowing, lending, buying insurances, trading derivatives, trading assets, and more. It doesn’t require paperwork or a third party on the blockchain. Moreover, DeFi is global, peer-to-peer, pseudonymous, and open to anyone.
Why are people using DeFi?
DeFi and decentralized exchanges (DEXs) around the world allow anyone easier access to credit, lending, and borrowing activities.
This technology changes the landscape of the conventional financial systems. Users make trades and move their assets wherever they want, without waiting for bank transfers or paying standard bank fees.
Although other crypto-specific fees, such as gas fees, may apply.
Where do decentralized exchanges get their money reserves?
Decentralized exchanges cannot call on centralized money reserves and rely exclusively on their users. Users can place cryptocurrencies into liquidity pools on decentralized exchanges and receive rewards for providing liquidity.
For example, the pool of tokens containing ETH and USDC. This pool is big enough to allow swapping ETH for USDC, without significant price impact.
Best DeFi dapps
Uniswap is the most successful decentralized exchange with billions of dollars in total value locked across its smart contracts. Uniswap is an Ethereum-based protocol that uses smart contracts to hold crypto assets in liquidity pools.
However, Ethereum gas fees are costly, so some of these dapps are shifting toward layer 1 and 2 scaling solutions. For example Solana, Polygon, BNB Chain, Avalanche, and Fantom to lower the trading costs for investors.
The landscape is changing fast, so it’s best to stay up to date using the DappRadar dapp rankings.
Best DeFi tokens
The tokens attached to the leading DeFi dapps are destined for more growth and longevity than those attached to failing protocols.
With DappRadar, users can discover the leading DeFi dapps and their native tokens on all the significant blockchains. This includes Ethereum, Solana, Polygon, and BNB Chain.
What are liquidity pools?
Liquidity is the ease with which you can change your crypto to fiat currency or another asset without affecting its price.
A liquidity pool is a crowd-sourced pool of cryptocurrencies or tokens locked into a smart contract within a particular dapp that is used to facilitate trades between the assets on a decentralized exchange (DEX).
Moreover, a DEX is useless without liquidity as it cannot facilitate transactions at reasonable rates.
Understanding liquidity providers
Liquidity providers are investors who place cryptocurrency tokens on DEXs to earn transaction fees, often referred to as liquidity mining or market-making.
The rewards vary based on the amount of liquidity available and the number of transactions in the liquidity pool. Liquidity providers are essentially the backbone of the DeFi space, as, without their input, a DEX could not perform its essential functions.
Making sense of DeFi wallets
A DeFi wallet is a non-custodial wallet that stores a user’s cryptocurrency and digital assets. They are non-custodial, meaning only those with the unique seed phrase or private key can access the funds. Non-custodial wallets are different from the wallets issued by centralized exchanges like Coinbase or Crypto.com, for example.
Those platforms simplify the onboarding process by creating a wallet for every user but never asking them to store private keys or seed phrases. In return, users of centralized exchanges sacrifice control over their assets, just like with a traditional bank.
However, a major difference between a bank and a crypto exchange is that deposits to a bank are often regulated and insured by government deposit schemes.
The two types of non-custodial wallets utilized most can be defined as hardware wallets and software wallets. Hardware wallets such as Ledger and Trezor look like USB sticks, and users can store their funds offline, often called cold storage.
Software wallets are online wallets you access through your web browser or phone. Popular examples include Metamask, Trust Wallet, and WalletConnect.
Know your stablecoins
A stablecoin refers to a cryptocurrency that is pegged to the price of another asset such as the US dollar, pound, or euro. The price of a stablecoin cryptocurrency does not fluctuate.
Instead, it follows the peg of its brother currency. Of course, if the peg fails, so does the stablecoin—an issue not truly faced by the industry as yet. The two most commonly used are USDT and USDC, pegged to the US dollar.
Stablecoins are popular with traders who need to move in and out of trading positions while hedging against a particular crypto.
Why do you pay a fee to swap tokens on a decentralized exchange (DEX)?
Simply put, a decentralized exchange (DEX) makes its revenue from fees, just like any exchange. The core difference is that on a DEX, the fee is written into the smart contract and executes automatically without needing third parties. For example, the contract will simply send 0.1% of the traded amount to the exchange’s wallet. Fees are also collected and distributed to liquidity providers to incentivize them to add liquidity in the first place.
Why are there so many decentralized exchanges?
Decentralized exchanges such as Uniswap exist in an open-source way, which means that anybody with the development knowledge can come along and essentially fork or copy and paste Uniswaps code into another dapp, giving it a new name with almost identical functionality.
When a dapp is forked, it complements the original protocol’s design and functionality, but it can essentially bring about competition in a small space. At writing, Uniswap has been forked more than 220 times. While OlympusDAO has over 100 forks in existence.
How to make money in DeFi?
The value locked up in Ethereum and alternative blockchain DeFi dapps has been rising steadily since the summer of DeFi in 2020, with many users reportedly making a lot of money. Using blockchain-based dapps, users can generate passive income by loaning out their money and generating interest from loans. Additionally, yield farming can bring even more significant returns with considerable risks. It allows users to leverage the lending aspect of DeFi and put crypto-assets to work, generating returns.
What is DeFi staking?
Staking in DeFi is locking up tokens in a smart contract to provide liquidity. In return, users gain rewards in that token, or another, over the timeframe they allow it to be locked up. In many ways, it’s similar to depositing money in a bank fixed deposit, like a savings account. Except in crypto, the percentage rewards for doing so are far greater than in traditional banks, which generally mirror global interest rates.
For example, RADAR token holders can stake their RADAR directly on DappRadar to earn more RADAR. Furthermore, in an industry-first move, DappRadar has pioneered cross-chain staking so that RADAR holders can stake and harvest RADAR rewards on any chain, and users can avoid Ethereum gas fees. Cool right!
What is yield farming?
Yield farming is using decentralized finance to maximize returns through lending or borrowing crypto on a DeFi platform to earn cryptocurrency in return. Yield farmers who want to increase their yield can employ more complex tactics and build positions on several networks and applications. Notably, users should always access the costs of these activities compared to the rewards to see if a profit margin exists and over what timeframe.
Lending money in DeFi
Crypto lending refers to decentralized finance that allows investors to lend their cryptocurrencies to different borrowers to get interest payments in return. Rewards can float between 1% and 20% on various platforms and higher for certain coins. Many platforms specializing in lending crypto also accept stablecoins pegged to the US dollar.
Borrowing money in DeFi
Using a DeFi platform, a borrower can take a loan. The lending process is executed from start to finish without intermediaries. A token holder sends tokens they intend to lend into a pool using a smart contract. Once the coins are sent to a smart contract, they become available to other users to borrow. A borrower will often have to provide collateral to secure the loan. Afterward, the smart contract issues tokens, usually the platform’s native token, that are distributed to the lender as a reward.
Staying safe in DeFi
This is a super exciting time to be getting started with blockchain technology. However, staying safe and protecting your identity and investments on the blockchain is crucial to your success in the space. There are some vital steps to take to ensure you’re protecting yourself.
The first and foremost in blockchain safety is protecting your wallet. Wallets like MetaMask are incredibly convenient and easy to use. It is also possible to control many wallets allocated to different actions. However, one of the main concerns with such services is that they rely on just two password phrases for security. In this sense, hackers can access your funds better if they manage to access these phrases. It is essential always to keep your crypto wallet password and seed phrase safe. Don’t store your seed phrase or passwords on public computers; always have a backup on paper, stored in a secure location. Most importantly, never give anonymous people remote access to your computer.
As the crypto space is in its early years of development, scam projects are unfortunately still thriving. In this sense, it is essential to thoroughly check any dapp or new project you are looking to invest in. Check their contract addresses, and explore their social media accounts.
Additionally, do some research on the team behind the project. This might be a big red flag if a project has not given any information about the development and management teams. Most successful crypto projects are very open about their creators and developers.
What content does DappRadar have specifically about DeFi?
DappRadar is the World’s Dapp Store and the leading authority on blockchain analytics. We record and analyze data from thousands of platforms; DeFi is a big part of our work. Rankings pages for DeFi show which dapps are performing the best over different periods. And our dedicated DeFi page gives an overview of the sector to show how it performs.
The DeFi section of our blog offers insights into the latest trends affecting decentralized finance. And we also have articles with updates on the latest news stories related to web3 DeFi apps. Our industry-leading quarterly and monthly reports are used by industry experts and regularly referenced by major media outlets.
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