A Brief Introduction to DeFi

DeFi is short for Decentralized Finance, it is the idea of having financial tools that run without the need of a middleman. 

All these DeFi tools, also known as decentralized apps (dapps), work because of smart contracts. Smart contracts are technical agreements that have rules in them. If these rules get triggered, then the smart contract will execute the action that it is supposed to.

As an example: 

Imagine a bank lends out money, then the bank has a set of rules: 

If supply = X and demand = Y, then the interest rate the bank will charge is= Z. Of course, this is very dumbed down but this is how it works. A smart contract does this in the same way except that it does it automatically. Think of it the same way as conditional ruling: if this (and “this” and “this” or “this”) then that.

Now, the entire financial system runs through companies, and it is difficult to use. You are required to create an account with each bank, you may be limited in what financial tools you can use depending on your location or your wealth status. 

People working in DeFi are trying to disrupt this. They want anyone that owns crypto to be able to take part in financial activities such as lending, borrowing, trading, creating a hedge fund etc. They also want this to happen in a trustless way where you are always in custody of your funds, and can do it no matter if you are from Germany, the USA or other countries.

Some examples of DeFi Tools (Dapps):

Uniswap:

Uniswap is a decentralized exchange meaning that it is like a peer to peer exchange that has no order book but will automatically give you the best price. 

Simply Explained – How does it work?

Uniswap uses liquidity pools which is a general concept used in many different DeFi protocols- for every token that is traded they have pools of liquidity (coins) that anyone can provide, by providing liquidity (coins) to these pools you receive a small fee. The same way that centralized exchanges like Coinbase and Binance have a trading fee and the fee goes to the company, with Uniswap the trading fee goes to the providers of the liquidity pool. 

Compound:

Compound is a lending protocol, it allows for people to lend and borrow their crypto from a liquidity lending pool similarly as in Uniswap people add coins to these pools for liquidity, they earn the interest and whoever borrows takes from the pool. Depending on the amount of cryptos in the lending pools or how much demand there is from borrowing the rates change. 

Simply Explained – How does it work?

It does this by allowing you to submit (send) tokens to a smart contract, this smart contract then has access to your funds and can lend it out to anyone that is looking to borrow these assets. On the other hand, the person that wants to borrow needs to put up a certain amount of collateral. The amount of collateral he would have to put up is called the collateral factor which may change depending on the asset. As an example, a user might put up $100 worth of ETH, if the collateral factor is 75% he could then borrow value of up to $75 plus will pay a certain % interest. Now if the value of the collateral drops meaning the price of ETH plummets his $100 dollar worth of collateral would be liquidated.

TokenSets:

TokenSets provides tokens that are linked to smart contracts; these smart contracts execute trades based on certain rules or trading strategies. Imagine someone has a trading strategy such as always buying when the price of an asset goes down 20% and always sells when the price of an asset increases by 20%. You can allocate your funds to this set and it will automatically trade for you.

Simply Explained – How does it work?

What happens is that you trade your ETH tokens for a certain TokenSet you will then own a TokenSet(insertnameofstrategy) token, this Set will then with the amount of capital you allocate to the smart contract in the background has allocated funds in the way that the strategy is executed, if a rule gets broken the smart contract will automatically execute the strategy again. For example: You have $100 in ETH and want to allocate it to a 50/50 ETH/WBTC set(Token name: 5050ETHWBTC). You would purchase the Set and the smart contract of the Set would buy $50 worth of WBTC and $50 worth of ETH. Meaning that your 1 5050ETHBTC token is in reality 50% ETH 50% BTC.


The TokenSets smart contracts can also rebalance meaning that depending on the strategy you have allocated towards it sells or buys similarly to algorithmic trading. Think of it as having an automated trading strategy where you are always in custody of the funds.

How to try out these tools?

There are a few ways that you can try out these tools:

METAMASK: more difficult, allows you to use more dapps
  1. Download METAMASK
  2. Setup a metamask wallet
  3. Send some funds to the wallet from your exchange or other Ethereum wallet
  4. Navigate to the webpages of these Dapps mentioned above
  5. Start using DeFi
Argent: easy mobile app option
  1. Download Argent
  2. Walkthrough the setup process
  3. Send or buy some ETH through the wallet
  4. Navigate to the finance section and start using DeFi

If you’d like to know more about ACCOINTING and what it can do for you in the DeFi space, try us out at http://www.accointing.com and we will be happy to answer your questions about Defi or join our Telegram community here.