DeFi 101: Part 3 - DApps & Getting Started; What Can DeFi be Used for?
Along with facilitating standard transactions with cryptocurrency, DeFi has a plethora of additional use cases in the financial realm.
These use cases include:
- Lending & Earning Interest: Lending has become one of the most common use cases for DeFi. DeFi lending platforms can facilitate numerous lending activities, including allowing users to borrow from their peers or from larger platforms. Additionally, DeFi lending also enables users to take the role of the lender themselves. The way DeFi lending works is through the use of collateral — a borrower offers up blockchain-based collateral (typically Ethereum cryptocurrency) in exchange for a loan. Depending on how the loan is facilitated, either the lender or the lending platform can determine if the loan accrues interest and what that interest rate is.
- Non-Collateral Lending: Non-collateral lending does exist in DeFi, though it is somewhat limited currently. This type of DeFi lending is more technically complicated and involves holding funds in liquidity pools.
- Trading: Imagine a stock market that never closes: That’s exactly what you have access to when trading or swapping assets using DeFi/dApps. Much of this trading occurs on DeFi trading platforms, which can be both centralized and decentralized. It is crucially important to research a trading platform before depositing funds, as one typically wants to avoid losing their funds to hacks or exploits.
- Domestic & International Payments: Payments are complicated, largely due to the many intermediaries involved in the payment process. This process becomes even more complicated when a payment is sent across borders and must be verified by multiple financial authorities. With DeFi, you can send funds and assets between peers without the need for any intermediaries at all — which means you can also sidestep the hefty payment fees that come with them.
As DeFi becomes more advanced, secure, and visible to the mainstream, the possibilities are endless for the types of financial services DeFi can offer.
3 Key Examples of DeFi Products
We’ve talked about wallets, dApps, and use cases — but what about the actual DeFi products?
In reality, digital wallets and cryptocurrencies are only the tip of the iceberg. An incredibly vast collection of products is available through DeFi, with the catalog of products growing larger every day.
Here are three key examples of DeFi products to know about beyond cryptocurrencies and digital wallets:
- Decentralized Exchanges: A decentralized exchange (DEX) is a peer-to-peer marketplace where you can purchase, sell, and trade your blockchain assets. DEXs rely on smart contracts rather than intermediary banks to carry out transactions and execute trade orders. Uniswap is one of the most well-known and widely used DEXs currently available on Ethereum.
- Centralized Exchanges: Centralized exchanges also exist and are, in fact, quite popular with many crypto and blockchain investors. This type of exchange will typically adhere to national regulations and are backed by larger financial institutions. For example, the popular exchange Coinbase is backed by JPMorgan and other large banks. However, the centralized nature of these exchanges makes them a topic of debate of whether or not they can truly count as DeFi products.
- Stablecoins: Many investors curious about DeFi and cryptocurrency are hesitant to get involved due to the volatile nature of crypto assets. Enter stablecoins — a type of cryptocurrency that is pegged to a fiat currency or other traditional commodity to help keep the value of the cryptocurrency more stable. This makes stablecoins a more viable option for traditional transactional activities, such as online shopping. Popular examples of stablecoins include Tether and USDC, both pegged to the U.S. dollar.
- Stablecoin Regulation: Thanks to their association with centralized currencies and commodities, stablecoins have become one of the key topics of interest for authorities striving to regulate the blockchain industry. In November 2022, the federal government in Canada announced its plan to consult on cryptocurrencies, stablecoins, and central bank digital currencies, which will include a legislative review.
- Lending Platforms: To facilitate DeFi lending, lending platforms are becoming a more common dApp available through Ethereum. These lending platforms connect borrowers to lenders and can also determine how interest rates are set. The current most popular DeFi lending platform is Compound, which allows users to both borrow and lend, and sets interest rates using an algorithm.
Final Thoughts: How to Get Involved with DeFi
The first key step to getting involved with DeFi is to get yourself a digital wallet.
This is your first big choice to make in DeFi — will you select the non-custodial wallet that comes with a bigger learning curve but greater overall control, or will you select the custodial wallet that is much more user-friendly but forfeits a large portion of your control to a third-party?
As we discussed earlier, there are both advantages and disadvantages to both types of wallets. Many beginning DeFi investors will opt for a combination of the two, splitting their funds and assets between the two for greater overall security as they learn and grow accustomed to the technology.
Next, you need to purchase Ether and choose your trading platform.
Unless you’re deep in the know in the DeFi realm, you will likely need the help of a trading platform to facilitate your DeFi activities.
To recap, you can choose between either a decentralized trading platform or a centralized trading platform. Like the different types of wallets, both have pros and cons.
DEXs allow you to connect your own wallet and maintain full ownership of your assets but they can be more technically challenging for beginners. Centralized exchanges often store your assets for you (or allow you to move your assets to a separate non-custodial wallet). However, most centralized exchanges will include some form of a custodial wallet solution.
Many of these exchanges — both decentralized and centralized — provide you with access to dApp marketplaces where you can browse through a variety of DeFi services.
Final Hot Take: You don’t have to be afraid of custodial wallets and centralized exchanges.
Custodial wallets and centralized exchanges have their place in the DeFi ecosystem. After all, someone has to exchange your FIAT money into digital assets–whether it be bitcoin or ether–and that someone will often be a regulated on-ramp.
This technology is still relatively new to most people and the learning curve can be intense. Custodial and centralized solutions offer greater accessibility to those who want to learn more about DeFi and begin participating but don’t know where to start.
The key when using these types of solutions is to DYOR.
Look for trustworthy whitepapers when looking at different DeFi projects and always opt for exchanges that uphold top-notch security measures. If you plan on using a centralized exchange, choose one that adheres to a strong regulatory framework and employs consumer protections like multi-signature approvals and ongoing monitoring for suspicious activity.
For residents of Canada, NDAX offers some of the best security around. NDAX is registered with the Financial Transactions and Reports and Analysis Centre of Canada and Revenue Quebec as a Money Service Business. Plus, NDAX is the first Canadian crypto platform to earn the SOC 2 Type II certification.
Get started with NDAX today or visit our blog to learn more about all things crypto and DeFi.
Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.