What is DeFi?

DeFi, or decentralized finance, is the opposite of centralized finance, where banks play a significant role. In traditional finance, banks collect deposits from retail investors at low annual interest rates and then lend this money to others at higher rates, earning a considerable profit as intermediaries. The concept of “reserve requirements” is central here, which means that banks must retain a certain percentage of deposited funds with the central bank to manage potential withdrawal demands. The main purpose of reserve requirements is to ensure the financial system’s stability and to prevent issues like liquidity shortages or disruptions due to excessive lending by banks. Typically, banks have a reserve requirement of less than 10%, meaning that for every 100 units of currency deposited, the bank must set aside 10 units with the central bank. The remaining 90 units can be loaned out or invested. Through this process of fractional-reserve banking, banks can effectively create up to 1,000 units of money from an initial 100-unit deposit by repeating this lending cycle.

DeFi, in contrast, is a new financial system built on blockchain technology, especially on smart contract platforms like Ethereum. The core concept of DeFi is to replicate traditional financial functions—such as lending, trading, payments, and deposits—through decentralized methods. By removing intermediaries like banks and financial institutions, DeFi enables more open, transparent, and trustless financial transactions. DeFi operates primarily through blockchain and smart contracts, which means that instead of relying on third-party institutions, the code itself enforces the rules and intermediates the transactions. In the DeFi space, the phrase “in code we trust” signifies this reliance on code rather than centralized authorities.

Key Features and Advantages of DeFi

1. Decentralization: DeFi systems use blockchain and smart contracts to perform financial functions without centralized management or control.
2. Trustless Environment: Users do not need to trust any institution or individual; instead, smart contract code automatically enforces rules and guarantees security.
3. Transparency: All transactions are recorded on the blockchain and are publicly accessible, which helps prevent fraud and increases security.
4. Global Accessibility: Anyone with internet access and a cryptocurrency wallet can participate in DeFi, without restrictions based on location or identity.
5. Openness: DeFi protocols are often open-source, allowing developers to innovate and build new financial applications on existing platforms.

DeFi Platform: Venus

Venus is a lending and staking platform based on the Binance Smart Chain (BSC), which also supports other platforms like Ethereum. Users on Venus can stake cryptocurrencies to gain liquidity or deposit funds to earn interest. As of November 3, 2024, Venus data shows a supply volume of $2 billion and a borrow volume of $530 million. Stablecoins like USDT and USDC offer an 8% supply interest rate and an 11% borrowing interest rate on the platform. On Venus, users can either supply cryptocurrencies to earn passive income or borrow funds to access liquidity for further investments.

Please note that the staking and lending rates on Venus are variable, and you can check the latest rates by visiting app.venus.io.

Risks

While DeFi offers a variety of profitable opportunities, it also comes with certain risks:

• Smart Contract Vulnerabilities: Errors in code could lead to loss of funds, so it’s essential to choose platforms that have been thoroughly audited.
• Market Volatility: Cryptocurrency prices are highly volatile, which can impact the value of collateralized assets.
• Liquidation Risk: In the case of borrowing, if the collateral value falls below a certain threshold, forced liquidation may occur, resulting in asset loss.

DYOR