DeFi is an alternative financial system built on top of blockchain networks like Bitcoin or Ethereum. It is growing very fast currently. More than $21.92 billion have been locked in different DeFi projects, according to data published by DeFi Pulse.
It is a substitute for traditional financial services. DeFi solutions are more transparent, secure, and immutable. They offer lending, borrowing, staking, yield farming, decentralized exchanges, investment, payments, trading, and analytics. It will be highly beneficial for the unbanked sections of the population who have been isolated by the current system. No centralized authorities or intermediaries will intervene in the DeFi system.
DeFi lending offers crypto assets as loans to eligible borrowers, and lenders receive interest over a period from the debtors. Borrowers will have to pledge collateral that protects them if they fail to pay the loan on time and in full to the lender. Some of the popular DeFi lending platforms are Aave, Maker, Compound, and InstaDApp.
Stablecoins have emerged to counter the extreme price fluctuation observed in Cryptocurrencies. Their value will be pegged to the leading fiat currencies, cryptos, metals, and commodities. It is highly liquid and free from any volatility. It can also be used as an efficient instrument for hedging against various market risks. Some of the well-known Stablecoins are USDT, USDC, DAI, and TrueUSD.
Decentralized exchanges came into the picture to thwart the risks of centralization. There is no central authority involved in a DEX and the traders can attain more freedom while managing their digital holdings. They will have a liquidity pool where all the investors deposit their respective assets. The escrow system supported by robust smart contracts handles all the operations on a real-time basis. Examples of Decentralized exchanges are Uniswap, SushiSwap, and Kyber.
Insurance is used for mitigating different risks and emergencies. It can act as a safeguard against bugs in the smart contract, hacking attacks, phishing attacks, and a downturn in the market. Insurance can be availed either personally or in the form of group insurance or community insurance. An insurance premium will have to be paid at frequent intervals. Nexus Mutual is a decentralized insurance platform that offers effective risk-sharing on the Ethereum blockchain network powered by smart contracts.
Synthetic Assets involves the development of a digital token financially backed by an asset. It can be traded in the leading crypto exchanges and secondary markets. Synthetix is a platform that offers synthetic assets in the form of derivatives. The users get access to sufficient liquidity and rewards for contributing collateral to the Synthetix protocol. It also has its own token named SNX.
Users lock up their digital assets for a particular time and earn rewards after a certain period. The platform functions based on the contribution from the liquidity providers who will earn returns based on their respective percentage or share. It is generally viewed as a high risk-high reward kind of investment. Different reward tokens can be fetched by reinvesting the reward tokens into the other available liquidity pools. Platforms like Yearn.finance and Compound offer DeFi yield farming facilities for the users where they can move around their money between various liquidity and lending protocols.
Staking involves the users holding their digital assets in a wallet and earning rewards by participating actively in the network. The rewards are calculated based on the total amount of staked assets, the current inflation rate, the network issuance rate, the staking duration, and the quantity of assets staked by the respective staker. It acts as a good source of passive income, the entry fees are quite low and the smart contract ensures a high level of security. Many top cryptocurrency exchanges in the market like Binance, Coinbase, Poloniex, and WazirX support DeFi Staking on their platforms.
Ethereum supported games are offering attractive incentive and reward models for the users. Some of the popular games functioning on the Ethereum blockchain network are Crypto Dragons, Axie Infinity, Sorare, EvolutionLand, and Very Nifty. They offer NFT (Non-Fungible Tokens) as rewards to the users.
Prediction involves speculating about some event that may or may not happen in the future. Augur is a limitless betting platform where users can predict the results of sports matches, important world events, and election results. It is decentralized, transparent, and there is an automatic payout of rewards.
Tokens are the representation of various digital assets. They can be traded and transferred easily by the investors for a low fee. It provides real value, more liquidity, and transparency. The top DeFi based tokens are Chainlink, Wrapped Bitcoin, Uniswap, Compound, and Maker.
DeFi analytics involves sharing data through interactive graphs and charts. It helps investors to make effective decisions while managing their assets. Insights will be provided on different aspects like gas prices, automated market-making, risk-return comparison, and transaction fees. Defistats is a DeFi analytics portal that provides real-time data about the Ethereum blockchain network. The growth rate in the crypto assets and the total value locked in them will also be displayed to the users.
DeFi wallets serve as a safe avenue to store the crypto tokens and coins of the investors. They can handle their funds using exclusive private keys. They have full control over their assets owing to the non-custodial nature. They are compatible with web and mobile platforms. Some of the commonly-used DeFi wallets are MetaMask, Argent, and Coinbase wallet. They are highly easy to use, operates 24x7, operates under the control of smart contracts, and can be integrated with popular decentralized applications. The users need not undergo KYC verification or a background check in DeFi wallets.
As seen above, DeFi Development is booming currently and gaining a lot of traction with innovative financial solutions being created in the market with every passing day. It requires progressive regulation and more adoption to become an integral part of the mainstream economy soon.
