Decentralized finance aims to build financial services that are independent of traditional financial and political systems. This will create a more open financial system that effectively eliminates censorship and discrimination on a global scale.

While the idea of ​​decentralized finance is attractive, it is not perfect. Finding the use case that best suits the characteristics of the blockchain is the most critical step in building a set of practical open financial products.

If it develops smoothly, DeFi will replace many large centralized organizations and devolve power into the hands of open source communities and individuals. Once DeFi hits the mainstream stage, it will be obvious whether a more effective financial system can be created.

Defi (DEFI) Buying Guide on Binance

Binance will continue to review and add cryptocurrencies that can be used on the Binance platform. If you want to buy Defi that is not currently listed on Binance, please follow the steps below. This guide will explain how to buy Defi. First, use your Binance account to bind your cryptocurrency wallet to a decentralized exchange (DEX) to buy the base currency.

1. Download the Metamask wallet

There are several cryptocurrency wallets to choose from in the Ethereum network, and Metamask is the most comprehensive. If you use a desktop computer, download the Google Chrome browser and the Chrome Wallet plug-in. If you are used to mobile phone operation, just download the wallet through Google Play and iOS App Store (if available). Please make sure to download the Chrome extension and mobile app through Metamask official website.

2. Set Metamask

Register and set up a cryptocurrency wallet through the Google Chrome extension of the wallet or the mobile app downloaded in step 1. Please refer to the support page of the wallet. Please make sure to keep the mnemonic phrase in a safe place and write down the wallet address. Both will be used in steps 4 and 6.

3. Buy Ethereum as base currency

After the wallet is set up, you can log in to your personal Binance account, go to the buying and selling cryptocurrency page, and buy Ethereum.

After registering on Binance, you can purchase cryptocurrency for the first time.

4. Send Ethereum from Binance to Personal Crypto Wallet

After purchasing Ethereum, go to the personal Binance wallet area to find the purchased Ethereum. Click “Withdraw” and fill in the required information. Set up the network as Ethereum, provide a personal wallet address and the amount to transfer. Click the “Withdraw” button and wait for Ethereum to appear in your personal Metamask.

5. Choose a Decentralized Exchange (DEX)

There are many options for decentralized exchange (DEX), just confirm whether the exchange supports the wallet selected in step 2. For example, using the Metamask wallet, you can go to 1inch for transactions.

6. Associate personal wallet

Using the wallet address from step 2, link the Metamask wallet to the desired decentralized exchange (DEX).

7. Use the Ethereum you want to trade the token you want to get

Choose Ethereum for payment, and select the desired Defi token.

8. If Defi is not displayed, you can find its smart contract

If the decentralized exchange platform (DEX) does not display the desired token, you can go to https://etherscan.io/ to find the corresponding smart contract address. Then copy and paste the address to 1inch. Beware of scams, please make sure you get the official contract address.

9. Apply for exchange

After the above steps are completed, you can click the exchange button.

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What is Decentralized Finance (DeFi)?

Decentralized Finance (“DeFi” for short) is an ecosystem of financial applications built on a blockchain network .
Specifically, the term “decentralized finance” refers to the creation of an open-source, permissionless, and transparent ecosystem of financial services. This ecosystem is open to everyone and operates without the authorization of any central authority. Users have full control over assets and can interact with the ecosystem through peer-to -peer (P2P) , decentralized applications (Dapps) .
The core advantage of DeFi is that financial services are at your fingertips, especially for people who are isolated from the current financial system. Another potential advantage of DeFi is that it is built on a modular framework – highly interoperable DeFi applications on public blockchains can create entirely new financial markets, products and services.
This article will introduce the basics of DeFi, including potential applications, advantages and disadvantages.

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What are the main advantages of DeFi?

Traditional finance relies on institutions such as banks as intermediaries, and also requires courts to provide arbitration.

DeFi applications can directly skip intermediaries and arbitrators. The code can provide solutions to various disputes that may arise, and users can also take full control of their funds. This approach reduces the cost of providing and using the product, resulting in a more harmonious financial system.

New financial services deployed on the blockchain eliminate single points of failure. Data is recorded in the blockchain and widely distributed across thousands of nodes, making censorship a complex task and reducing the chance of service interruptions.
The framework for DeFi applications is built ahead of time, and deploying applications on it is simple and completely reliable.

Another important advantage of DeFi is to deepen the openness of the financial ecosystem, which can cover more groups who cannot enjoy financial services. The main way for the traditional financial system to obtain benefits is intermediary institutions, which generally do not provide services to areas where low-income groups are located. However, DeFi can cut costs drastically, and low-income people can also benefit from a variety of financial services.

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What are the potential use cases for DeFi?

Loan

Open lending protocols are one of the most popular applications in the DeFi ecosystem. Compared with traditional credit systems, open decentralized lending has many advantages, including instant transaction settlement, support for collateralized digital assets, no credit review, and possible standardization in the future.

Lending services are built on a public blockchain, minimizing the level of trust required, while being protected by cryptographic verification methods. The blockchain-based lending market reduces counterparty risk, reduces borrowing costs, speeds up lending, and effectively expands the audience.

Money Banking Services

DeFi is a financial application by definition, and money banking services are a typical use case. These include stablecoin issuance, mortgage lending and insurance.
As the blockchain industry matures, the creation of stablecoins is gaining more and more attention. Stablecoins are usually digital currency assets pegged to real assets that can be transferred digitally with relative ease. The price of digital currency can fluctuate wildly at times, but decentralized stablecoins can be used as digital cash for daily use, and can be issued and monitored without a central authority.

Mortgage loans are expensive and take longer to disburse, mainly due to the need for many intermediaries to step in. With the advent of smart contracts, underwriting and legal fees could be significantly reduced.

Insurance on the blockchain can skip intermediaries and spread risk across numerous participants. In the case of the same service quality, the insurance premiums that the policyholders need to pay have been reduced.

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Decentralized Market

Such applications may be difficult to evaluate and belong to the DeFi sector with the broadest financial innovation space.

Arguably the most important DeFi application among them is the Decentralized Exchange (DEX) . Through these platforms, users can directly trade digital assets without having to hold funds through a trusted intermediary ( exchange platform ). With the help of smart contracts, different users can directly complete transactions through their personal wallets.
Decentralized exchanges require less maintenance work, so transaction fees are much lower than centralized exchanges.

Blockchain technology is also frequently used for the issuance and empowerment of various traditional financial instruments. These applications operate in a decentralized manner, eliminating the need for custodians and completely eliminating single points of failure.

For example, security token issuance platforms provide issuers with the tools and resources to launch tokenized securities with customizable parameters in the blockchain.

Other projects support the creation of derivatives, synthetic assets, decentralized prediction markets, and more.

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What role do smart contracts play in DeFi?

Most existing and potential decentralized financial applications involve the creation and execution of smart contracts . Whereas regular contracts clarify the relationship between different entities in the contract through legal terms, smart contracts use computer code.
The terms in a smart contract are written in computer code that takes effect by running the code. Numerous business processes that previously required human oversight can now be performed automatically and with guaranteed reliability.

Using smart contracts, both parties can reach transactions more conveniently and quickly, and transaction risks are also reduced. On the other hand, smart contracts also bring new risks. Computer code is highly prone to bugs or bugs that can reveal very important confidential information.

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What challenges does DeFi face?

  • Inefficiency: Blockchains are naturally slow compared to their centralized competitors, which also affects applications built on top of them. Developers of DeFi applications need to take these constraints into account and continuously optimize their products.
  • User error poses high risk: DeFi applications shift responsibility from intermediaries to users, causing distress for many. Products are deployed on a blockchain that cannot be tampered with, so it is very difficult to minimize losses caused by user error through product design.
  • Inexperience of users: Currently, users have to work harder to navigate DeFi applications. In order to become a core element of the global financial system, DeFi applications must bring tangible value to users, allowing them to leave the traditional financial system and move to DeFi applications.
  • Ecosystem chaos: Finding the best application for a specific use case is extremely difficult, and users must have the ability to find the best solution. The challenge comes not only from building applications, but also how to integrate users into the huge DeFi ecosystem.

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What is the difference between DeFi and Open Banking?

Open banking refers to the banking system authorizing third-party financial service providers through APIs , allowing them to securely access financial data. In this way, banks and non-bank financial institutions can associate accounts with data. Essentially, it can spawn new products and services within the traditional financial system.
However, the new financial system proposed by DeFi is completely independent of the existing infrastructure. Therefore, DeFi is sometimes called “open finance”.

For example, it can securely fetch data from many banks and institutions, managing all traditional financial instruments in the same application.

On the other hand, decentralized finance supports a new financial instrument management model and creates a new way of interaction.

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What is a smart contract?

In the 1990s, Nick Szabo first proposed the concept of smart contracts. At the time, he defined smart contracts as tools for regulating and securing computer networks by combining protocols and user interfaces.

Szabo discussed the potential use of smart contracts in various areas related to contractual agreements, such as credit systems, payment processes, and content rights management.

In the field of cryptocurrencies, smart contracts can be defined as applications or programs running on the blockchain. Often, they function as a digital protocol enforced by specific rules. These rules are predefined by computer code, replicated and enforced by all network nodes .
Blockchain smart contracts support the creation of trustless protocols. This means that both parties to the contract make commitments through the blockchain without needing to know or trust each other. The parties have determined that if the conditions are not met, the contract will not be executed. In addition, using smart contracts eliminates the need for intermediaries, thereby significantly reducing operating costs.

While smart contracts have been underpinned by the Bitcoin protocol for years, it was only popularized by Ethereum creator and co-founder Vitalik Buterin. It is worth noting that each blockchain implements smart contracts differently.
This article will focus on smart contracts running in the Ethereum Virtual Machine (EVM), an essential part of the Ethereum blockchain.

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How do smart contracts work?

Simply put, a smart contract is a deterministic program that performs a specific task when certain conditions are met. Therefore, smart contract systems usually follow the “if…then…” conditional statement. Although the concept of “smart contract” is widely known, it is neither a legal contract nor smart. They are just a piece of code running in the blockchain distributed system.

In the Ethereum network, smart contracts are responsible for executing and managing blockchain operations as users (addresses) interact with each other. Addresses outside of smart contracts are called “external accounts (EOAs)”. Therefore, smart contracts are controlled by computer code, while external accounts (EOAs) are controlled by users.

An Ethereum smart contract basically consists of a contract code and two public keys. The first public key is provided by the contract creator, and the other public key is the contract itself and is used as a unique digital identifier for each smart contract.

All smart contract deployments take place through blockchain transactions, which are only activated when an external account (EOA) or other smart contract is invoked. However, smart contracts are generally triggered by an external account (EOA), i.e. the user for the first time.

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Key Features of Smart Contracts

Ethereum smart contracts have the following common characteristics:

Distribution
Smart contracts are replicated and distributed across all nodes in the Ethereum network. This is very different from other centralized server based solutions.
Certainty
When the requirements are met, the smart contract only executes the pre-designed actions. And, the results remain the same regardless of who does it.
Autonomy
Smart contracts, as opposed to “self-executing” programs, automate various tasks. Most of the time, unfired smart contracts remain “sleeping” and do nothing.
Immutability
Smart contracts cannot be changed after deployment. Smart contracts can only be “deleted” after a specific function has been implemented. So, let’s say that smart contracts provide tamper-proof code.
Customization
Before deployment, smart contracts are encoded in a variety of ways. Therefore, it can be used to create a wide variety of decentralized applications ( DApps ). This goes hand-in-hand with the fact that Ethereum is a Turing-complete blockchain.
Trustless
Two or more parties can interact through smart contracts without needing to know or trust each other. Additionally, blockchain technology will ensure that the data is accurate.
Transparency
The basis of smart contracts is a public blockchain, so the source code is not only immutable but also transparent to everyone.

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Can smart contracts be changed or deleted?

Once deployed, Ethereum smart contracts cannot add new functions. However, as long as the contract creator reserves the “SELFDESTRUCT” function in the code, that function can then “delete” the smart contract and replace it with a new contract. If the function is not reserved in the code, the smart contract cannot be deleted.

Notably, with so-called upgradable smart contracts, developers have more flexibility with the immutability of contracts. There are many ways to create an upgradeable smart contract, each with a different level of complexity.

As a simple example, suppose a smart contract is divided into multiple smaller contracts. Some parts are designed to be immutable, while others enable a “delete” function. That is, parts of the code (smart contracts) can be removed and replaced, while other functionality remains the same.

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Benefits and Use Cases of Smart Contracts

As programmable code, smart contracts are highly customizable and can be designed in many ways to provide a rich variety of services and solutions.

As decentralized and self-executing programs, smart contracts increase transparency and reduce operating costs. Depending on the specific implementation, smart contracts can also improve implementation efficiency and reduce cumbersome costs.

Smart contracts are especially useful when it comes to transferring funds or transactions between two or more parties.

In other words, smart contracts can be tailored for a wealth of use cases , including the creation of tokenized assets, voting systems, cryptocurrency wallets, decentralized exchanges, games, and mobile apps. Smart contracts can also be deployed alongside other blockchain solutions, covering areas such as healthcare , philanthropy , supply chain , governance , and decentralized finance (DeFi) .

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About ERC-20

Tokens issued on the Ethereum blockchain follow the ERC-20 standard. This standard specifies the core functionality of all Ethereum tokens. As such, these digital assets are often referred to as “ERC-20 tokens” and are a large part of existing cryptocurrencies.
Many blockchain companies and startups have deployed smart contracts to autonomously issue digital tokens on the Ethereum network. After the token offering, most companies distribute their own ERC-20 tokens through an initial coin offering (ICO) . In most cases, the use of smart contracts can effectively achieve fund transactions and token distribution in a trustless manner.

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Limitation of Smart Contracts

Smart contracts consist of computer code written by humans. The code will have flaws and loopholes, which will bring many risks. Ideally, smart contracts should be written and deployed by experienced programmers, especially when sensitive information and large sums of money are involved.

In addition to this, some people think that centralized systems can provide most of the solutions and functions of smart contracts. The main difference is that smart contracts run in a distributed P2P network instead of a centralized server. Also, smart contracts are based on a blockchain system, so are often immutable or difficult to change.

The immutability advantage of smart contracts is obvious, but in some cases it can backfire. For example, the decentralized autonomous organization “The DAO” was hacked in 2016, and millions of ether (ETH) went missing due to a flaw in the smart contract code.

Since smart contracts are immutable, developers cannot fix the code. This eventually led to the hard fork , and the second Ethereum chain was born. In short, a chain (part of the current Ethereum blockchain) is “reverted” to what it was before the hack, returning funds to their owners. The other chain, now known as “Ethereum Classic”, decided not to intervene in the hack, insisting that events happening in the blockchain should never be tampered with.
It should be noted that the problem is not caused by the Ethereum blockchain, but caused by the wrong execution of the smart contract.

Another limitation of smart contracts is related to their unclear legal effects. Smart contracts are in a grey area in most countries and are not yet applicable to the current legal framework.

For example, many contracts require both parties to the transaction to be properly authenticated and over the age of 18. But the anonymity of blockchain technology, coupled with the lack of an intermediary, conflicts with contractual requirements. A solution to this problem may emerge in the future. However, smart contracts run in a distributed network without borders, and it is very difficult to enforce laws.

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Disadvantages of Smart Contracts

Some blockchain enthusiasts see smart contracts as an autonomous solution that will soon replace much of the existing business and bureaucratic system. While the idea may come to fruition, there is still a long way to go before it becomes the norm.

Smart contracts are indeed an interesting technology. However, features such as distribution, determinism, transparency, and immutability sometimes make smart contracts less attractive.

The essential drawback of smart contracts is that they cannot solve many practical problems well. In fact, some organizations are currently using traditional server solutions as a stopgap solution.

Compared to smart contracts, centralized servers are easier and less expensive to maintain, and tend to have greater advantages in terms of speed and communication (interoperability) across the network.

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Summary

There is no doubt that smart contracts have had a profound impact on the field of cryptocurrency, and indeed brought a major change to the field of blockchain. End users do not necessarily interact directly with smart contracts. But in the near future, the application of smart contracts will be more extensive, covering various fields such as financial services and supply chain management.

Together, smart contracts and blockchain have disrupted nearly every area of ​​society today. But only time will tell if these breakthrough technologies can break through the hurdles and eventually achieve mass adoption.

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