Welcome to our learning blog series – Building Blocks!

Within these blogs we aim to explore and explain concepts across the digital space. By doing so in ways that are familiar and relatable, we hope to make blockchain technology easier for everyone to understand.

Today we’re looking at Decentralized Finance, or DeFi for short!

The TL;DR

• DeFi is the digital alternative to traditional financial services

• DeFi is peer-to-peer and global; no third-party financial institutions

• No barrier to entry, access from anywhere, any time

• Access all manner of financial services easily through dApps

• Wonder Wallet is your first step into DeFi space!

What is DeFi?

DeFi (Decentralized Finance) is a broad term for financial services and products that operate on blockchain technology.

Like a traditional banking service, you have a wallet (account) that allows you to access any number of financial products, like borrowing, lending and trading.

Unlike a traditional banking service, there are no intermediaries. The DeFi space instead operates through applications with a peer-to-peer (between two people, no third parties) global network.

DeFi is the digital alternative to traditional lending, investing and more!

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In the DeFi space, you’ll often come across the term TradFi. TradFi (Traditional Finance) is just what it sounds like, financial services and products offered in the traditional way through financial institutions like a bank or brokerage.

How does DeFi work?

DeFi works by employing three key pieces of technology to recreate traditional financial services in a decentralized manner.

Blockchains are the base for DeFi, providing a global network for applications to operate on.

Cryptocurrency powers the blockchain and provides the base currency for transactions to be paid in. The base currency is dependent on the network – for example, ETH is used on the Ethereum network and associated L2s.

Smart contracts handle the transactions, removing the human element of financial deals.

This is a very basic overview, and we will tackle each piece in more depth in future blog posts! For now, let’s keep digging into DeFi itself.

What are the main benefits of DeFi?

Low barrier for entry: DeFi platforms are open to anyone, anytime. There are no third parties requiring a long approval process, you simply open a wallet and you’re able to access the DeFi space in minutes.

Run by users: Users can participate directly in the networks and their governance by voting. This can include things like changes to DeFi protocols or updates to rates.

Pseudonymous: You can access all services without providing personal information. With DeFi you’re represented by your wallet address – a hash of 42 characters on the ETH network.

Fast and flexible: You’re in control of your assets, you can move them anywhere, any time without long waits or needing approval from outside sources.

Transparent and public: Transactions are recorded on the blockchain, not hidden in a bank ledger. This means everyone can access and view each transaction that’s made.

What are some of the drawbacks of DeFi?

It can be volatile: Depending on what token or dApps (Decentralized Applications) you’re using, investments can be volatile in this new tech space.

Frequent transactions can be expensive: Gas fees can fluctuate rapidly and suddenly make active trading expensive. Both the Ethereum organization and various Layer 2 networks (including WonderFi Labs!) are working on ways to bring these fees down or remove them entirely.

DeFi is technically complex: Getting into the DeFi space and operating in dApps and on L2 networks generally requires a certain level of knowledge of how blockchain technology works. Wonder Wallet aims to remove these barriers so anyone can access the DeFi space!

What are some services that DeFi networks offer?

Lending and Borrowing: In traditional finance, if you want to borrow money, you go to a bank, fill out forms, and get approved based on your credit score.

In DeFi, you can lend or borrow money directly from other users through smart contracts; no third-party approval required. You deposit your cryptocurrency into a DeFi lending platform to earn interest (generally at a much higher rate than any traditional saving account), or you can borrow funds by providing collateral with your assets.

Popular dApps in this space include AAVE, Compound and Yearn.finance.

Trading: In traditional finance to exchange your CAD to EUR for an overseas trip you would need to go into your financial institution and request the exchange. This can take time and can cost a lot in exchange fees.

DeFi instead uses decentralized exchanges (DEXs) where users can trade cryptocurrencies directly with each other; no intermediaries, wait times or high fees involved.

Popular dApps in this space include Uniswap, Curve and Sushiswap.

Derivatives: These are financial contracts that derive their value from an underlying asset. In traditional finance this can be things like stocks or bonds. In DeFi your underlying assets are cryptocurrencies.

In both cases similar style contracts are used, like futures or options contracts. This style of investing allows you to make speculative guesses about the future of a particular coin without as much risk as directly buying the coin itself.

Staking: Staking involves locking up your cryptocurrency in a DeFi protocol to support its operations and earn rewards. The length of time can vary, but generally you get greater rewards the longer you lock your crypto into a protocol.

Think of it like a fixed term investment at a traditional financial institution. You agree to lock up a certain amount of funds for a specific period. During that period, you earn higher interest rates than a traditional savings account but cannot access the money until the term expires.

How do I get started with DeFi?

Getting into the DeFi space is easy. Simply download the Wonder Wallet app, create a wallet and you’re all set to explore!

Wrap Up

Imagine being able to lend, borrow, trade, and earn interest on your assets, all without going through a bank or other centralized entity. Imagine financial freedom available regardless of your location or financial history.

That's the promise of DeFi!

Wonder Wallet aims to make accessing that promise easier than ever with a simplified DeFi wallet than anyone can use. Android early access is now open, and we invite you to check out the Wonder Wallet today!

You can also follow us on X or hop into Discord for all the latest news and updates, and we’ll see you in the next Building Blocks where we’ll tackle Blockchain Technology!