DeFi: what is and how the Decentralised Finance works

Published: November 5, 2021 by Andrew

The term DeFi is becoming more and more popular but not everyone knows what it is, so in this guide we will try to clarify the world of Decentralised Finance.

We will show you how it works, which are the most important cryptocurrencies in this sector and how to invest in DeFi.

Let’s start from this last point to show you how to buy and sell cryptocurrencies related to DeFi.

How to invest in DeFi? Follow these 4 steps:

  1. Register with a regulated CFD Broker like eToro
  2. Make the minimum deposit required
  3. Verify that it offers the cryptocurrency you are interested in
  4. Decide how much to invest in the operation

Thanks to CFD Brokers you can invest in DeFi cryptocurrencies, speculating on price fluctuations with the protection of the supervisory bodies.

Here is a list of the best cryptocurrency trading platforms on the market, choose which one to use to invest, they are all regulated:

Platform: etoro
Min. Deposit: 50€
License: Cysec
  • Social Trading (Copy the best)
  • Simple and intuitive
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: xtb
    Min. Deposit: 100€
    License: Cysec
  • Free demo
  • Whatsapp Group
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: iqoption
    Min. Deposit: 10€
    License: Cysec
  • Free demo without limitations
  • Minimum deposit low
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: ubrokers
    Min. Deposit: 250€
    License: Cysec
  • Free Training
  • Zero Commissions
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: trade
    Min. Deposit: 100€
    License: Cysec
  • Free demo
  • Free course trading
  • ➥ Start
    1star 1star 1star 1star 1star
    72.30% of retail CFD accounts lose money
    Platform: forextb
    Min. Deposit: 250€
    License: Cysec
  • Free trading course
  • Free trading signals
  • ➥ Start
    1star 1star 1star 1star 1star

    What is DeFi?

    DeFi is a term given to financial services that do not have a central authority or control center.

    Unlike the finance we are all familiar with, DeFi uses decentralized money, like some cryptocurrencies.

    DeFi projects are linked to Smart Contracts and allow you to perform automated activities when the pre-set conditions are met.

    Among these activities we find: Loans, insurance and commercial exchanges of various kinds, without any intermediary.

    DeFi Ethereum

    To create a decentralized system that works and runs the services and programs set, a very complex infrastructure is required.

    Fortunately, Ethereum was born precisely for the purpose of allowing the use of DeFi in the crypto world.

    Ethereum is not only the ETH cryptocurrency that many trade and that we all know, it is also a platform that allows you to write decentralized finance programs called Dapps and run them.

    Through Ethereum we can write the famous Smart Contracts to create and manage any financial service. Once the rules are written and the program started on the Ethereum network we have no control over it, which will continue to run under the conditions for which it is programmed.

    Invest in DeFi

    Investing in DeFi means focusing on the most interesting projects of this new economic ecosystem and the cryptocurrencies on which they are based.

    These investments are very risky, DeFi cryptocurrencies are not all valid projects, some fail. They are like startups before going public, not all of them manage to become profitable and “die”.

    However, there are some very valid DeFi projects and we advise you to evaluate them at least on the basis of market capitalization, usually a high capitalization denotes greater solidity of the project (although this is not always true).

    Let’s see now how to invest in altcoins that are part of DeFi projects. The intermediaries are the classics: Cryptocurrency exchanges and CFD brokers.

    Below we show you the main differences between the two approaches to investing in cryptocurrencies:

      Cryptocurrency Exchange CFD Broker 
    Pros
    • You “actually own” cryptocurrencies
    • Safe and authorised
    • You can invest both: up and down
    • No commission fees
    • No risk of cryptocurrency theft
    • Immediate transactions
    Cons
    • Commissions to pay
    • No licence
    • You can invest only upwards
    • Serious safety problems
    • Slow transactions
    • You “don’t actually own” cryptocurrencies

     

    Summarising further we can say that:

    • Exchanges are expensive (you pay commissions), dangerous (they suffer frequent hacker attacks) and allow you to earn only if prices rise.
    • CFD brokers, on the other hand, are regulated and safe, there are no commissions to pay and there is also the possibility of earning when prices fall.

    How to invest in DeFi

    In this paragraph we see how to invest in DeFi, or how to invest in the most popular DeFi cryptocurrencies on the market.

    We know that there are many less famous DeFi cryptocurrencies that can offer great profit possibilities but the risk becomes very high and if you bet on these “little known” projects you are making a bet rather than an investment.

    Having made this necessary premise, we advise you to use CFD brokers and speculate in the short term on the price fluctuations of these cryptocurrencies.

    This way you reduce risk, without exposing yourself for too long and you don’t pay trading fees.

    Furthermore, the safety factor is in your favor. The CFD brokers we offer are all regulated, there is no risk of scam nor of a cyber attack.

    We have chosen two brokers who, due to the quality of the services offered and overall reliability, offer excellent platforms for investing in DeFi cryptocurrencies.

    eToro

    eToro represents the first choice of many investors in the world, its reliability is confirmed by CONSOB and has convinced over 20 million users.

    Its trading platform is very intuitive and offers leading large-cap DeFi cryptocurrencies.

    How to invest in DeFi cryptocurrencies on eToro?

    • Register on eToro
    • Make a deposit of at least 200 euros
    • Select the cryptocurrency you are interested in and click on “Trade”
    • Decide whether to buy or sell the crypto and how much to invest in the operation
    Click here to invest in DeFi on eToro

    For investors who prefer automatic systems, eToro has patented the famous Copy Trading.

    This tool allows you to copy the operations performed by the best traders, chosen by you on the Broker’s platform.

    Just a simple click and Copy Trading will copy the operations of the chosen traders, on your account,.

    In this way you will get the same returns as these trading experts (in proportion to the investment made), without having done practically anything.

    Here are the returns (relative to last year) of some particularly capable traders:

    etoro copytrading

    Click here and choose which trader to Copy

    Trade.com

    It’s hard to find a better platform than Trade.com, especially for those who are truly starting from scratch. Trade.com is a simple and intuitive platform: as soon as you sign up, you receive free assistance from a true Crypto, trading and investment expert who provides precise information: making mistakes is difficult.

    Those who want to learn more have the opportunity to download an excellent guide for free that explains in simple words how to earn with trading and investments (of cryptocurrencies but also of traditional financial stocks).

    This ebook has had hundreds of thousands of downloads precisely because it is really easy to read, even for a beginner and above all because it is very practice-oriented: it explains in simple words how you earn.

    And then it’s free, which doesn’t hurt since other trading guides have very high costs (and are probably even less good). Click here to download the Trade.com ebook for free.

    The benefits of Trade.com don’t end there. For example, it is possible to use the platform in demo mode, i.e. with virtual money, in order to experiment without risk before starting to operate with real money.

    You can sign up for free on Trade.com by clicking here

    DeFi how it works

    To make classical finance work, money is needed and decentralized finance is the same.

    For DeFi it takes money, but not fiat currencies, cryptocurrencies are needed but not all are good. You cannot make DeFi programs and smart contracts work with a cryptocurrency that fluctuates frightfully like Ethereum for example, apart stablecoins.

    Stablecoins are cryptocurrencies linked to a fiat currency, usually the US dollar. For DeFi we use DAI, a truly reliable decentralized stablecoin that cannot be closed or censored, so it’s a perfect form of money for DeFi services.

    Loans

    Among the most interesting services provided by DeFi are the loans without intermediaries.

    For example, there are Ethereum-based lending apps that allow you to lend cryptocurrencies and earn interest or, borrow money by depositing cryptocurrencies as a form of guarantee.

    The platform that offers the service automatically connects the lender and the recipient of the loan, applies a contract (a smart contract) between the parties, establishes the terms of the loan and distributes the interest.

    But in addition to loans, DeFi also allows you to take out decentralized insurance policies, without an insurance company and many other financial products that are just emerging. The possibilities offered by this new financial ecosystem are practically endless.

    DeFi platforms

    There are numerous services that are offered thanks to DeFi, such as decentralized exchanges, or DEX.

    DEXs operate by following the smart contracts they are based on, which allow users to buy, sell or trade cryptocurrencies. Just like DAI, DEXs also reside on the Ethereum platform, which means they operate without a central authority.

    Benefits and Risks of DeFi

    The advantages of decentralised finance are transparency, decentralisation, lack of intermediaries, lack of manipulation, etc. 

    But of course, this is an industry in its infancy and the risks are numerous, so be careful.

    The smat contracts are not without bugs, the writer does not always foresee every possible scenario and there may be “malfunctions”.

    It must always be remembered that hackers will try to exploit the DeFi flaws to steal money, so the extraordinary services that decentralized finance offers are not yet “safe”.

    If we talk about investments, the best way to try to profit from DeFi is to trade cryptocurrencies related to the most promising DeFi projects in the short term, using the best brokers (such as those proposed in this guide).

    Cryptocurrencies

    Among the numerous DeFi projects that crowd the cryptocurrency market, we have selected some that represent very interesting investment opportunities:

    • Aave is a decentralized lending protocol that allows people to lend and borrow cryptocurrencies.
    • Synthetix is ​​a derivatives trading protocol that allows trading of synthetic assets. These assets are nothing more than tokens linked to various markets such as fiat, cryptocurrencies, commodities, etc.
    • Yearn. finance is the token whose individual value surpassed that of Bitcoin in September 2020. It is a yield aggregation platform that helps people maximize their DeFi investments.
    • Uniswap, launched in 2018, is a decentralized exchange for DeFi tokens. What particularly appeals to this platform is its decentralized nature which leaves no room for third party manipulation.
    • Chainlink is a project that connects smart contracts with the real economy through a decentralized Oracle network. Oracles are nothing more than external devices that connect to the Ethereum network to provide the necessary data to smart contracts, without any possibility of manipulation.
    • Polygon and its interoperability platform between blockchains.
    decentralised finance

    Conclusions

    Decentralized finance represents a real revolution that is only just beginning. It will take some time to see the development and widespread adoption of these new decentralized platforms.

    Even if a finance without intermediaries, at low costs and accessible to all is the dream of many, we are still far from achieving it.

    The path taken by DeFi is also very interesting from the point of view of investments and is the one on which it is worthwhile to pay more attention.

    The CFD brokers we have proposed are perfect for short-term speculation on decentralized finance altcoins. They are safe, reliable and commission free.

    Initially, we suggest you do some tests in Demo, without risking money and optimizing your investment strategy. Later, with a simple deposit you can quickly switch to real trading.

    Here are the official links to access the Demo accounts of the best cryptocurrency trading platforms:

    What is DeFi?

    This is Decentralized Finance, a type of finance without intermediaries based on smart contracts and dapps. This ecosystem runs on blockchain networks and needs cryptocurrencies to function.

    What are DeFi Loans?

    They are loans provided without intermediaries, through platforms that connect the creditor to the debtor and manage the contract by dividing the interest.

    What are DeFi cryptocurrencies?

    They are those cryptocurrencies linked to DeFi projects and which serve to power and support the service.

    How to invest in DeFi?

    The easiest way to invest in DeFi is to take advantage of CFD brokers like eToro, which are commission free and allow you to trade numerous cryptocurrencies.

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