Nowadays, DeFi (Decentralized Finance) became such a buzzword. The whole crypto space grows at incredible speed, whereas DeFi has situated in the center of attention and it will likely become a catalyst for the upcoming bull market. At this rapid development, it is hard to keep up with all new projects whose number is growing every single day. Before we go through some of the most popular DeFi projects, first we will explain what is DeFi and how this new technology is becoming one of the most hyped trends in 2020. Moreover, what effect it already has on the traditional financial sector.
DeFi is a structured and interoperable financial sector built mostly on the Ethereum blockchain. It contains smart contracts, protocols, and dapps (decentralized applications). Imagine all the use cases in traditional finance. Lending, borrowing, saving, trading, derivatives, exchanges, and much more. Everything on the open, decentralized, censorship-resistant, and permissionless system which anyone in the world can use and be part of. Having a smartphone and internet connection is enough. Doesn`t this sound too much utopic? Thanks to blockchain technology this disruptive idea is feasible.
Now we will explain the essential characteristics of DeFi and why it is the banker's worst nightmare.
Anyone can participate and use DeFi apps (dapps) and protocols. Unlike traditional finance, you don't have to open an account and fill the complicated forms. In DeFi there is no KYC ( Know your customer) regulation because no central authority is responsible for all the data storage. Also, the very nature of the blockchain technology neutralizes bureaucracy and control mechanisms.
All the protocols, smart contracts, and dapps are built upon the decentralized technology, different than being built and controlled by a single, centralized entity
The code is public and it is fully accessible for anyone to audit. This is the core crypto value. "Don't trust, verify" is a popular phrase in the crypto community. Besides all the transaction history is also visible for anyone to view. While this raises privacy concerns, transactions are not tied directly to your real-life identity because you didn't give your personal information. In contrast, central banks in the traditional financial sector aren’t transparent at all. They print money out of thin air and give out loans to their friends. But this is not a rant on central banks but a DeFi overview, so let`s continue.
When it initiates, no one can stop a transaction. Once a transaction becomes a part of a new block, it is impossible to reverse or delete it. Unlike in traditional finance where banks can put a person on the blacklist, or simply expel an individual from the system.
In DeFi space it is possible to build or compose different projects by combining other DeFi projects like Lego pieces. This term well describes and visually represents the composability of DeFi systems.
Users of DeFi platforms can be sure that only they have access to their funds. Far from centralized crypto exchanges and traditional banks which hold and control customer's assets.
Realistically, DeFi kicks the banks out of the equation. There is no need for a rent-seeking middleman in the new decentralized world. Central authorities are taking unfair advantage by charging high fees to their customers. Since DeFi came to the scene, the cost of accessing essential financial services decreased a lot.
According to the World Bank Group data, 25% of the world's population is currently unbanked. One of the fundamental human rights is to send and receive money without limitations. Until the invention of cryptocurrencies, 25% of the global population's wrights were threatened.
While Bitcoin only enables simple transactions, DeFi brings much more abilities to normal users. Investing, lending, borrowing, saving, and other important features are now possible with these innovative technologies. This will truly change people's lives and give them better opportunities to grow their wealth.
The market is overestimating every new, innovative, and disruptive technology in the short term. Meanwhile, it is highly underestimating it in a longer timeframe. Is DeFi a bubble? Not yet, but probably will become one. Similar as we saw in 2017 when the ICO boom became too exuberant at that time. Blockchain will do to the financial system what the internet did to media.
DeFi brings clear utility to blockchain space and takes a very important place. Crypto is the infancy phase. The speculation makes up the bulk of the market right now. But speculation drives the market forward and draws huge attention.
According to the DeFi Pulse, the current overall value in DeFi is a stunning $6.41. Additionally, as more investors allocate their funds to Decentralized finance, we will see innovation flourishing on a much higher scale. With more funds locked in DeFi people will be incentivized to invest larger amounts of money. Growth is inevitable.
The fact that it took 917 days to lock $0 to $1 billion and only 2.2 days for another $5 to $6 billion, speaks for itself. The trend is clear.
Since the new money is pouring into DeFi, the number of fresh projects is overwhelming. Therefore, we are going to mention the most substantial use cases and platforms from a market cap view.
Maker is a decentralized credit platform running on the Ethereum blockchain. The project has $1.41 billion locked in and its dominance is 23.26% of TVL ( Total value locked). When someone wants to take a credit it is required to open a vault and deposit certain collateral type assets that are voted and decided from Maker token holders. The collateral is used to generate the debt which exists in the form of DAI, the first decentralized stablecoin. All loans are overcollateralized for now, and users can borrow up to 66% of the collateral's value.
Compound is an algorithmic money market protocol that is running on the Ethereum blockchain. This protocol makes it possible to borrow money as well as earn interest by lending. Furthermore, just like Maker, it requires collateral to function correctly. You can deposit assets in liquidity pools, and starting to earn interest immediately. Interest rates can vary over time since they are based on supply and demand dynamics. The protocol deals with several cryptocurrencies, and just like in Maker holders of COMP token can decide to add new crypto assets and vote for them.
Chainlink is a decentralized oracle structure and framework that provides real-world data to smart contracts on a blockchain. To execute the smart contract, certain conditions have to be satisfied. These conditions are usually in an off-chain data format. The difficulty arises in connecting the information to blockchain smart contracts in a language that they both understand. This is the time for oracles to step in. Chainlink, with the decentralized approach, is trying to solve a central point of weakness.
Uniswap is an Ethereum based exchange that allows anyone to swap ERC20 tokens. Traditionally exchanges are based on order books that require buyers and sellers to create liquidity. Uniswap uses an automated market mechanism that enables anyone to participate in different liquidity pools. Adding liquidity to an ERC20 token also requires the disposition of an equivalent value of ETH. Whenever exchange occurs, liquidity providers earn 0.3% interest, proportionally to their deposits.
In the crypto community, there is a meme “Bitcoin- magic internet money”. Similarly, we can say that DeFi is the same kind of “magic” happening in the space. The new monetary and financial system is growing from scratch. Innovation is flourishing, and the DeFi sector will grow and become the future of finance for sure.
In this article, we only got through the primary use cases and the most popular DeFi projects. We encourage you to do your own research and further explore other progressive projects.
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