Decentralized exchanges (DEX) allows the investors to trade without the interruption of any third parties, on the other hand decentralized money markets allows the investors to either purchase or borrow assets directly from the blockchain.
In this blog we will know about What Are Decentralized Exchange (DEX)? Decentralized Money Markets? What Are Money Legos? What Are The Pros and Cons Of DeFi?
What Are Decentralized Exchange (DEX)?
As an investor, it is important to know about how a thing can be used for one’s benefit and what are its purposes. Here we talk about the use cases of a Decentralized Exchange.
- The use case of decentralized exchange, or DEX for short is DEXes operate according to a set of rules, or smart contracts, that allow users to buy, sell, or trade cryptocurrencies. Just like DAI they also reside on the Ethereum platform which means they operate without a central authority.
- When you trade on a DEX, there is no exchange operator, sign-ups, identity verification, or withdrawal fees. Instead, the smart contracts enforce the rules, execute trades, and securely handle funds when necessary.
- Also, unlike a centralized exchange, there’s often no need to deposit funds into an exchange account before conducting a trade. This eliminates the major risk of exchange hacking which exists for all centralized exchanges. But the range of decentralized financial services doesn’t stop there.
What Are Decentralized Money Markets?
Let’s move on to what are decentralized money markets? A decentralized money markets are the 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”. The term yield farming is given to the effort of putting crypto assets to work while seeking to generate the most returns possible.
So we have decentralized stablecoins, decentralized exchanges and decentralized money markets. How about decentralized insurance? All of these new financial products definitely entail some risks which we will cover shortly, so why not create a service that insures 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.
What Are Money Legos?
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.
What Are Some Pros And Cons Of DeFi?
Pros Of DeFi
By now you can probably imagine what are the Pros of DeFi:
- Transparency
- Interoperability
- Decentralization
- Free for all services
- Flexible user experience,
These are some of the few advantages of DeFi out of many.
Cons Of DeFi
However there are also some risks and disadvantages of DeFi that you should be aware of:
- The most important risk is that DeFi is still in its infancy DeFi RISKS and 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 in order 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.
- Furthermore, it should be remembered that a system is so decentralized as its most central unit. In other words one service may be only partially decentralized, and yet as soon as small part is centralised it can conceivably be the Achilles heel for everything.
Before investing in a product, it is important to know exactly how that service or item of production functions, so you do not think all kinds of wrong things might occur.
Conclusion
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.