Decentralised Finance (DeFi) is becoming increasingly popular.
Put simply, DeFi includes all financial service applications that run on public blockchains.
In this guide, we’ll explore the basics so that you too can benefit from the advantages DeFi has to offer.
What Is DeFi?
In DeFi, retail users can take advantage of services that conventional financial service providers have predominantly been providing to wealthy clients for decades — exchange currencies, borrow, lend, earn interest, trade assets, trade derivatives and much more.
Conventional financial service providers are part of what is referred to as Centralised Finance (CeFi) though, meaning that they act as gatekeepers or intermediaries for the lion share of financial services provided today.
This implies that retail users need to go through these institutions if they’d like to use specific financial instruments or buy and sell specific financial assets.
Contrastingly, in DeFi, retail users don't require intermediaries to get things done.
All financial services in DeFi are peer-to-peer, directly between two people.
Also, all transactions are transparent, anonymous and open to all — this is the power of blockchains.
Basically, you can think of DeFi as a decentralised Wall Street – by the people and for the people.
The only thing you need to participate in DeFi is a non-custodial wallet.
If you’re ready to dive into DeFi, make sure to purchase some cryptocurrencies on a centralised exchange (CEXs) such as Binance, Coinbase, FTX or Kraken.
Once you've done that, you can send these cryptocurrencies to your non-custodial Solana wallet.
What DeFi Apps Can You Use?
Now let’s explore some of the things you can do in DeFi.
We’re going to focus on Solana because the blockchain offers very low fees and fast transaction times when interacting with DeFi apps.
1. Decentralised Exchanges (DEXs)
All of these are centralised exchanges (CEXs) that allow you to buy and trade digital assets such as cryptocurrencies — either directly or through limit orders.
But, CEXs have some drawbacks, which you can read about in our upcoming CEX vs. DEX guide.
That’s why decentralised exchanges (DEXs) have become increasingly popular.
On Solana, you’ll find a whole host of DEXs.
However, some DEXs specialise in derivatives.
Derivatives derive their value from an underlying asset or index.
Put differently: A derivative mimics the value, i.e. index/spot price, of a predefined asset.
One derivative of Solana is SOL-PERP, a perpetual futures contract or swap.
Perpetual futures contracts or swaps, short: perps, offer a whole host of benefits, which you can read about in our upcoming What Are Perpetual Futures Contracts/Swaps guide.
2. Automated Market Makers (AMMs)
AMMs allow you to swap one cryptocurrency to another one.
Let’s say you bought some USDC on FTX.
An AMM lets you swap that USDC to any other cryptocurrency you’d like: USDT, Ether, SOL etc.
In the future, you’ll not only be able to swap cryptocurrencies in an AMM, but all blockchain-related digital assets.
Having said that, most DeFi users rely on aggregators such as Jupiter.
Aggregators are protocols that find the best price across all available protocols and quote that price to its users.
3. Lending & Borrowing
Just like in the conventional financial system, DeFi allows you to both lend and borrow digital assets.
For now, that’s mostly only possible with cryptocurrencies.
Let’s say you swapped your USDC for some SOL.
You don't want to sell your SOL, as you expect its price to go up.
But you’d like to earn some interest on it — for sure.
If you’d like to use a different cryptocurrency to interact with other DeFi apps, you can borrow it on Solend and Port Finance as well, using your deposited SOL as collateral.
4. Structured Products
Doing everything on your own in DeFi can not only be confusing, but also really time-consuming.
That’s why structured products are popular among DeFi users.
Vaults are based on a strategy that uses derivatives such as options to generate sustainable, risk-adjusted yields.
But be careful which vaults you choose, make sure to read the fine print and be aware of the risks.
5. Synthetic Assets
One last interesting aspect of DeFi you should consider are synthetic assets, or synths.
Synths are digital assets that are pegged to real-world assets by means of tokens on a blockchain.
This means that you can trade synthetic assets such as, for example, synthetic commodities like sURA (uranium) or sXAU (gold) with the same prices as their "real world" counterparts, i.e. uranium or gold.
This allows you to gain direct exposure to exotic real world assets – without needing to deal with a lot of red tape and restrictions.
The best place to trade synths on Solana is Synthetify.
We hope our guide helped you in understanding what DeFi is and how you stand to benefit from it. Remember, using DeFi can be risky!
Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
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