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DeFi: Explained for Beginners


DeFi is the short form of Decentralized Finance. This term refers to a wide variety of financial decentralized applications in the blockchain or cryptocurrency domain for doing away with financial intermediaries. You can use Decentralized Finance to invest and earn crypto.

What is DeFi?

Decentralized Finance DeFi draws inspiration from blockchain and allows multiple entities to hold a copy of the history of transactions. This means that no single entity or central source controls the Decentralized Finance network or DeFi app. It is a revolutionary step in the financial space, global economy, and emerging markets because it does away with the centralized systems and human gatekeepers, seen in the traditional financial world.

In the traditional financial system, human gatekeepers and centralized systems can significantly limit the sophistication and speed of transactions. In traditional finance, users have less direct control over their money. This is where DeFi is revolutionary. It expands the scope of blockchain from simply being used as a value of the transfer to more complex financial use cases.

If you are making a payment with a credit card, a financial institution works as an intermediary between you and the business. This institution has immense power over the transaction. It has the authority of pausing or stopping the transaction. The institution also keeps a record of the transaction in a private ledger. With the introduction of Bitcoin and other decentralized applications, their intermediary institutions are cut out of the picture.

What Are the Benefits of Decentralized Finance?

DeFi leverages the main principles of the Ethereum blockchain for:

  • Increasing financial security and transparency
  • Unlock liquidity and growth opportunities
  • Support an economic system that is standardized and integrated

The main advantages of the Decentralized Finance system are:

  • Programmability: Smart contracts are highly programmable, which helps in automating execution. It also helps in creating new financial instruments as well as digital assets.
  • Immutability: Data coordination can be done in a tamper-proof manner across the decentralized architecture of the blockchain, increasing both security and the ability to audit.
  • Interoperability: The composable software stack of Ethereum ensures that the DeFi protocols, as well as apps, are built for integrating and complementing each other. Developers and product teams have more flexibility with the decentralized finance system. It helps in building on top of existing protocols, customizing interfaces, and integrating 3rd party applications. Decentralized Finance protocols are also called “money logos” for this reason only.
  • Transparency: Other users on the network can verify every transaction on the public Ethereum blockchain. This high level of transparency around transaction data helps in a rich analysis of data and at the same time ensures the availability of network activity to all users.
  • Open Source Code: The protocols of Ethereum and DeFi that run on the system are built with the help of open-source code. Anyone can view, audit, and build upon this open-source code.
  • Permissionless: Decentralized Finance is defined by its open, permissionless access. The DeFi applications that are built on Ethereum can be accessed by anyone irrespective of geographical locations and minimum fund requirement. For access, you simply need a cryptocurrency wallet along with an internet connection.
  • Self-Custody: The market participants of Decentralized Finance can always keep custody of their assets and also control their personal data through the use of Web3 wallets such as MetaMask for interacting with permissionless financial applications and protocols.

You can get regular updates about decentralized finance technologies, different tokens, decentralized lending, through the weekly newsletter of DeFi news as well as DeFi Pulse.

Decentralized Finance vs Traditional Finance

  1. While the money is held by companies in traditional finance, money in a Decentralized Finance system is held by the user itself.
  1. In traditional finance, you have to trust an intermediary company or entity to manage your money. Whether the company will lend to a risky borrower or not depends on that company’s discretion despite the fact that the money belongs to you. However, in the case of Decentralized Finance, you have complete control over where the money goes or where the money is spent.
  1. As manual processes are involved, payments can take many days in the traditional system. However, in Decentralized Finance, the transfer of funds takes place almost instantaneously, within minutes with the help of DeFi tokens or crypto assets. Some of the leading DeFi tokens in terms of market capitalization are:
  1. Uniswap (helps to exchange tokens)
  2. Chainlink
  3. Dai
  4. cUSDC
  5. cDAI
  6. Terra
  7. Aave
  8. cETH
  9. Amp
  10. PancakeSwap
  1. While financial activity is intertwined with the identity of the user in traditional finance, it remains pseudonymous in DeFi.
  1. While you’ve to apply for financial services in a traditional system, it is completely open to everyone in a Decentralized Finance system.
  1. Traditional markets have to be closed because employees need breaks. However, in the case of Decentralized Finance, the markets always remain open.
  1. In Decentralized Finance, any user can take a look at the data of a product and also inspect how the DeFi system works. However, the financial institutions in the traditional financial world are closed books. You can never ask to check their loan history or record for managing assets, and others.

What can you do with Decentralized Finance?

Many things can be done with the help of decentralized finance protocols. Some of the most important ones are given below:

  1. Asset and portfolio management
  2. Compliance and KYT
  3. DAOs
  4. Data applications and analytics
  5. Derivatives
  6. Developer and infrastructure tooling
  7. DEXs or Decentralized Exchanges
  8. Gaming
  9. Identity
  10. Insurance
  11. Lending and borrowing
  12. Margin trading
  13. Marketplaces
  14. Wealth managements
  15. Payments
  16. Prediction markets
  17. Savings
  18. Stablecoins
  19. Staking
  20. Synthetic assets
  21. Trading
  22. Tokenization, and other decentralized financial products

How to Invest in DeFi?

You can invest in DeFi by:

  1. Trading decentralized financial assets.
  2. Yield farming.
  3. Earning interest in a lending protocol.

Top 6 Best DeFi Tokens to Buy (having High Market Caps)

  1. Uniswap, 0x: decentralized exchange
  2. Aave: interest rate protocol
  3. MakerDAO: lending protocol defi project
  4. Synthetix, UMA: Synthetic assets such as tokenized Tesla shares
  5. Yearn Finance: automated investing defi ecosystem
  6. DAO: investment Decentralized Autonomous Organization

Buy DeFi Tokens Now

If you are ready to buy Bitcoins, Ether ETH, Defi tokens, non fungible tokens, and other crypto assets, you can do so in a legit way by investing through cryptocurrency apps. You have to open an account with such crypto exchanges, verify details (including basic personal information), and then fund cryptocurrency trading accounts.

You can start depositing funds to your crypto exchange account to buy cryptocurrencies by connecting your bank account (savings accounts or checking accounts), transferring fiat currency money online through bank transfer, credit cards, debit cards, and other payment options. If you need further assistance, you may consider taking help from the vibrant and helpful Ethereum community. You can trade these tokens with credit cards, debit cards, or other payment options through reliable crypto trading platforms.

In case you are bullish on the future prospects of DeFi coins, basic attention tokens, stable currencies, USD Coin, ERC20 tokens, and other altcoins, you can buy them from decentralized or centralized exchanges. Then transfer them to hot wallets (including mobile app wallets and software wallets) or cold wallets (including most secure hardware wallets) and hold them for a longer time period for a significant price appreciation. Keep your tokens safe with Ledger Nano S, Trezor One, other Ledger and Trezor models, or other popular ones.

Investing in Defi coins will help you get a higher return in the long run, much more than investing in stocks, mutual funds, index funds, real estates, yield savings accounts, real estate investment trusts, fiat currency trading (forex trading), and others. In fact, many retirement funds or IRA accounts such as Roth IRA are allowing investors to purchase XRP, Bitcoin, Chainlink, DeFi coins, and other digital assets of investment in the portfolio so that the prospects of these funds increase due to the higher returns of the cryptocurrencies.  

Therefore, it can be concluded that holding Bitcoin Ethereum and other cryptos can help you to build real wealth and multiply your net worth. You can learn investing basics to buy crypto currency and other digital assets to make more gains. You can start going through Wall Street Journal and other investing magazines on cryptos to learn more about investing in cryptocurrencies and make better financial decisions. You can learn about valuation calculation to the true value of bitcoin and DeFi coins and assess the overpriced or underpriced situations instantly.

As a beginners guide, you may also check out the trading basics provided by various cryptocurrency exchanges such as Coinbase, Binance, Kraken, and others to buy decentralized finance tokens, bitcoin, and other cryptos. Defi tokens and NFTs (Non Fungible Tokens) are the next generations of crypto coins that you must invest in.

These decentralized coins have started to become very popular among traders who trade cryptocurrency. You can buy and sell them through cryptocurrency trading platforms too or include them in your investment portfolio for better diversification of coins. To diversify your portfolio, you may also buy stocks through stock brokers.

Get better guidance on improving your personal finance, retirement planning, management of cash flows or capital gains, and investment ideas from financial advisors and wealth managers, especially the ones who are not averse to Bitcoin, DeFi, NFTs, and other cryptocurrencies.

While day trading, you should always try to invest only that much which you can afford to lose money. When you do margin trading, be very careful. Financial protection must be there in your mind always while you make cryptocurrency trades. While investing in cryptos, try to buy them through centralized or decentralized exchanges and reliable online brokers, and online brokerage firms.

Choose Cryptocurrency Copy-Trading Bots to Increase ROI

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What’s so special about NapBots?

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  2. A unique crypto trading bot library so that you can create your own mix of trading strategies
  3. Autopilot mode that enables you to automate trading 24×7
  4. An easy-to-use interface so that you can copy the proven strategies of NapBots to make successful trades and make money

How does NapBots help you to Make Money?

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Why Choose NapBots?

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Related Resources:

If you still need assistance, you can refer to the following step-by-step purchasing guides for the various payment methods: