DeFi: How It Works and How to Trade Safely

DeFi, or decentralized finance, refers to financial services that operate on blockchain technology. The main idea is to provide access to a wide range of financial services using cryptocurrencies instead of traditional state-backed currencies.

What services does it include?

• Lending and Borrowing: DeFi platforms allow users to lend and borrow funds directly, bypassing banks. For example, you can lend your cryptocurrency and earn interest.
• Asset Exchange: Decentralized exchanges (DEX) enable cryptocurrency trading without intermediaries.
• Earning Income: Users can earn interest on their assets through staking or providing liquidity.
  Insurance and Trading: DeFi platforms also offer decentralized insurance and trading opportunities.

The main principle of DeFi is decentralization. Instead of centralized intermediaries, processes are managed through software code. This code is open, and changes to it are often made democratically — through community voting.

Another important aspect of how DeFi works is accessibility. All you need is a device with an internet connection. Users can both develop their own applications and utilize existing ones.

People are rewarded for participating in services — for example, by providing liquidity. At the same time, they can choose to use the public interface of a platform or create their own project.

1. Smart Contracts: Programs that automate the execution of agreements and facilitate transactions without intermediaries.
2. Web3 Wallets: Serve as universal tools for interacting with DeFi applications. They are non-custodial, require no registration, and provide access to multiple applications through a single interface.
3. Liquidity Pools: Ensure token availability for exchanges and other operations.
4. DEX: Platforms that allow users to trade tokens without intermediaries. These exchanges use liquidity pools and automated market makers (AMM) to offer instant transactions and full control over funds.
5. Stablecoins: Provide stability in the volatile world of cryptocurrencies.
6. Oracles: Connect DeFi applications to data from the outside world, including exchange rates, weather information, sports results, and other accurate data necessary for executing smart contracts.

Create a Web3 wallet: install MetaMask or Trust Wallet and save your seed phrase. Buy crypto: purchase ETH or USDT on an exchange and transfer it to your wallet.

Choose a strategy: invest in DEX liquidity pools to earn commissions; earn interest through Aave; or engage in yield farming for maximum profits. Start small: test protocols with minimal investments. And diversify: spread your funds across different assets and platforms.

It’s important to regularly monitor the market — research new protocols and participate in governance if you have governance tokens.

DeFi already allows users to lend and borrow assets without involving banks. In the future, more advanced protocols with improved collateral management and lower fees are expected. The integration of real-world assets as collateral will make lending more versatile.

Financial institutions are gradually adopting blockchain technology. In the future, this will lead to the implementation of hybrid solutions, where DeFi and traditional finance (TradFi) complement each other.

Opportunities for passive income will continue to grow: protocols will offer more diverse and low-risk staking options. New solutions for automatically allocating assets to maximize returns will emerge. Investing in DeFi will become even easier.

The future of DeFi looks bright. Innovations will make decentralized finance safer, more accessible, and more user-friendly. These technologies will not only continue to revolutionize the financial sector but also help create a more inclusive and equitable global economy.