expand/collapse risk warning

CFDs come with a high risk of losing money rapidly due to leverage. 71% of accounts lose money when trading CFDs with this provider. You should understand how CFDs work and consider if you can take the risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

71% of retail investor accounts lose money when trading CFDs with this provider.

Trading Terms

DeFi explained: how decentralized finance works

DeFi: An image depicting the blockchain technology, showcasing interconnected blocks.

Decentralized Finance, or DeFi, represents a radical shift from traditional banking and financial services, offering a blockchain-based form of finance that eliminates the need for intermediaries. By leveraging smart contracts on Ethereum and other blockchain platforms, DeFi enables users to lend, borrow, trade, and earn interest on their assets in a permissionless and transparent ecosystem. 

This article explores the fundamentals of DeFi, its operational mechanisms, the benefits and risks associated with it, its distinction from cryptocurrencies, and guidance on how to invest in DeFi, including a list of relevant cryptocurrencies available for trading.

What is DeFi?

DeFi, short for Decentralized Finance, is an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries. DeFi draws inspiration from blockchain, the technology behind the digital currency bitcoin, which allows several entities to hold a copy of a history of transactions, meaning it isn't controlled by a single, central source. 

This is important because centralized systems and human gatekeepers can limit the speed and sophistication of transactions while offering users less direct control over their money. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases like lending and borrowing.

How does DeFi work?

DeFi applications operate on public blockchains, primarily Ethereum, allowing users to interact with smart contracts directly from their cryptocurrency wallets. These smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary's involvement or time loss. 

This framework supports the creation of decentralized applications (DApps) that provide financial services without the need for a central authority.

Experience the thrill of trading NZDJPY
Trade NZDJPY with ZERO commissions and NO markups,
15th Apr - 19th Apr | between 00:00 & 21:00 UTC.
Trade now

What are the benefits and risks of DeFi? 

Decentralized Finance (DeFi) has emerged as a groundbreaking movement, redefining the boundaries of financial services with its blockchain-based solutions. By democratizing access to financial instruments, DeFi promises to make banking and investment opportunities universally accessible, challenging the traditional financial ecosystem's status quo. 

However, as with any innovative technology, DeFi comes with its own set of challenges and risks. Understanding these benefits and risks is essential for anyone looking to navigate the DeFi space effectively. Below, is an overview to aid in this understanding:

Benefits Risks
Accessibility: DeFi provides global access to financial services, especially for unbanked populations. Smart contract vulnerabilities: Bugs or exploits in smart contracts can lead to significant financial losses.
Transparency: Blockchain technology ensures that all transactions are transparent and auditable by anyone. Market volatility: DeFi markets can experience high volatility, with rapid price changes leading to potential losses.
Innovation: The DeFi ecosystem fosters innovation, introducing new financial products and ways to earn returns. Regulatory uncertainty: The evolving regulatory landscape may affect the operation and accessibility of DeFi services.
Permissionless: Users can interact with DeFi applications without needing approval from a central authority. Liquidity risks: Some DeFi platforms may face liquidity issues, affecting users' ability to withdraw their funds.
Interoperability: Many DeFi protocols are built to work together, increasing their utility and efficiency. Scalability issues: As DeFi grows, the underlying blockchain infrastructure may struggle to handle increased demand.

Understanding the difference between DeFi and cryptocurrencies

While both DeFi and cryptocurrencies are integral components of the blockchain universe, they serve distinct functions and embody different aspects of this digital revolution. Cryptocurrencies like Bitcoin and Ethereum, are digital or virtual currencies that use cryptography for secure financial transactions. 

DeFi, or Decentralized Finance, on the other hand, represents a broader application of blockchain technology to build a financial system that is open, transparent, and accessible to all, without the need for traditional financial intermediaries. Below, is an overview to aid in this understanding:

Aspect DeFi Cryptocurrencies
Definition DeFi refers to decentralized financial services on the blockchain, allowing for lending, borrowing, and trading without traditional intermediaries. Cryptocurrencies are digital or virtual currencies secured by cryptography, used primarily for payments and investments.
Purpose Recreate and improve existing financial systems by making them more accessible, efficient, and transparent. Facilitate digital transactions and act as a store of value or investment.
Technology Use Blockchain technology to create decentralized applications (DApps) that offer a wide range of financial services. Based on blockchain technology but focus mainly on the creation and management of digital currencies.
Intermediaries DeFi eliminates the need for traditional financial intermediaries by using smart contracts and decentralized protocols. Reduce reliance on central financial authorities, some forms of crypto transactions may still involve intermediaries (e.g., exchanges).
Examples Uniswap (for decentralized trading), Aave (for lending and borrowing), MakerDAO (for stablecoin issuance). Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC).
Capitalise on volatility in cryptocurrency markets
Take a position on moving cryptocurrency prices. Never miss an opportunity.
Sign up

How to invest in DeFi & list of cryptocurrencies you can trade with us

Investing in DeFi involves engaging with the various protocols and platforms that offer DeFi services. This can include directly lending or borrowing funds through DeFi platforms, providing liquidity to a liquidity pool, or investing in DeFi tokens that represent projects in the space.

Skilling offers over 60 Cryptocurrency CFDs, including (but not limited to): 

  • Major cryptocurrencies: (in terms of market capitalization: Bitcoin, Ethereum, Binance coin, Ripple, and more.
  • Altcoins: Dogecoin, Polkadot, Monero, Cardano (just to name a few)
  • Sports coins: PSG, AC Milan, Atletico Madrid, Barcelona & more! 

Before investing, it's important to conduct thorough research and consider the risks associated with DeFi. Start small, diversify your investments, and continuously monitor the performance and security of the DeFi platforms you engage with. 

To help you in your learning process Skilling’s new education hub offers over 100 training courses to help get you started including 12 free lessons in Crypto trading.

Ready to explore cryptocurrency CFD trading Join Skilling and gain access to a wide range of digital currencies and trading tools.

Past performance does not guarantee or predict future performance. This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.

Experience the thrill of trading NZDJPY
Trade NZDJPY with ZERO commissions and NO markups,
15th Apr - 19th Apr | between 00:00 & 21:00 UTC.
Trade now
Capitalise on volatility in cryptocurrency markets
Take a position on moving cryptocurrency prices. Never miss an opportunity.
Sign up