DeFi (decentralized finance) is an ecosystem of applications that provide financial services without a central authority, using cryptocurrency. It is based on distributed networks, the most common of which is the Ethereum blockchain, ideal for deploying applications. This area of digital technologies is now rapidly developing and includes a variety of services – lending, insurance, stablecoins, derivatives, cryptocurrency exchanges. The editors of Bitcoinminershashrate.com invites you to get acquainted with a detailed overview of the features and components of DeFi.
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DeFi can perform all the same functions as traditional banks, but much more efficient and convenient… The movement of decentralized finance makes it possible to use loans, open interest-bearing accounts, trade without the need to trust centralized companies. Services are provided through decentralized applications (dApps), usually deployed on the Ethereum platform. At the same time, it is absolutely not necessary to be an Ethereum specialist to use them, although for a deeper understanding of the process it does not hurt.
If we compare traditional and decentralized finance according to the main criteria:
DeFi protocols are code, and it is always executed exactly as programmed, and the same for each participant, without exception. Any vulnerabilities or flaws in the code are immediately apparent.
DeFee’s movement is aimed at solving the main problems of traditional finance: low transaction speed, regulatory control, high fees, limited availability. It is able to eliminate these differences and provide access to financial transactions for every person without any type of censorship.
MonolithosDAO platform experts have identified three of the most important advantages of Decentralized Finances . The first is decentralization, thanks to which control over the ecosystem belongs to all participants at once, transactions are fast and transparent, there are no intermediaries. The second is smart contract management. And the third is open source code, which can be checked and modified at any time, as well as used to form other services based on them.
Decentralized finance has found its way into more than ten mainstreams – and there is no doubt that the list will continue to grow. Let’s take a closer look at each of them and you will see why exactly the principles of DePhee in them fell into place as much as possible.
Stablecoins are cryptocurrencies, the rate of which is always equated to fiat currency. They were created to mitigate the high volatility of digital currencies, which can reach 10% in a single day. One of the first centralized stablecoins was Tether (USDT) pegged to the US dollar. It is very popular, and yet it has one major drawback – the owners are forced to trust the company that issues the coins in the fact that dollar reserves do exist in the corresponding volume.
Decentralized stablecoins are issued by overcollateralization by decentralized autonomous organizations. They work in public registries, and anyone can check their stock absolutely freely. Stablecoin cannot be called an application, but it is an important component of most applications from other categories, so it was considered at the very beginning.
An example of a decentralized stablecoin is Maker ( https://makerdao.com/ru/ ). Maker Dao
Loans and deposits using cryptocurrency are not news, but initially such platforms were only centralized, they are still in demand today. Of course, decentralization was able to bring a lot of new and useful things into this area.
Traditional financial systems require a person to have a bank account in order to use credit or deposit money at interest. At the same time, a significant part of the world’s population does not have an account, just as there is no way to open one. This is not the only problem. Obtaining a loan from a bank is also accompanied by other obstacles: you need a good credit history and a stable official income.
DeFi lending is based on the concept of credit pools – some users invest cryptocurrency there in order to earn interest, while others can take out a loan secured by cryptocurrency, and with very loyal interest rates and without any credit checks. The pledge itself is evidence of collateral.
The largest credit pools are Compound ( https://compound.finance/ ) .
The tokens used in smart contracts are potentially vulnerable – hackers want to gain access to them. Of course, the code of most of the demanded projects has been checked for vulnerabilities, but the risk always remains.
Insurance is required to cover damages in the event of unauthorized hacking, especially when it comes to large amounts. Developed a decentralized insurance protocol Nexus Mutual ( https://nexusmutual.io/ ), which offers insurance for any smart contract running on the Ethereum blockchain.
We are talking about derivatives – contracts, the value of which is determined by the value of underlying assets – cryptocurrencies, indices, stocks, commodities, bonds, etc. Derivatives are used by traders to hedge the risks of transactions.
Derivatives are now traded mainly on centralized exchanges, but DeFi platforms are emerging for this purpose. They are protocols for synthetic assets that track the value of the underlying assets and allow access to them without the need for acquisition.
The largest DeFi derivative protocol is Synthetix ( https://www.synthetix.io/ ).
Centralized exchanges like Binance or EXMO both mediate trading and store user assets. Clients have no control over their funds, and if the exchange is hacked, there is a risk of financial loss.
To solve this problem, decentralized exchanges DEX have been created. Through them, users can exchange assets directly without trusting anyone to store them. Examples of such exchanges: dYdX, Binance DEX, Uniswap . They operate on the blockchain, do not store confidential customer data on servers, and only provide a service for matching orders for the purchase and sale of assets.
One of the main values of cryptocurrencies and decentralized systems is the direct transfer of assets from user to user without the participation of intermediaries, which means without delays and overpayments. With the advent of DeFe projects, there are even more opportunities for implementing various interesting solutions.
We can cite as an example the Sablier project (https://sablier.finance/) , which changes the configuration of payments – now, instead of the usual transactions, these are peculiar flows. This gives quite a lot of potential opportunities that are highly accurate.
Such DeFi projects decentralize the issue or creation of securities in order to avoid turning to any intermediaries (in traditional financial structures, these intermediaries are usually played by investment banks). The market for tokenized securities implies the issuance of tokens with the properties of securities (they are called security tokens). It is noteworthy that they fully comply with the legislation on securities.
Usually, security tokens are backed by assets or give the right to a share of the issuer’s profits. They can also be:
One of the advantages of security tokens over standard shares is the increased liquidity – they can be split into smaller units. Thus, even despite the low liquidity of the underlying asset, the tokens related to it can be quite liquid.
Securitize, Polymath are examples of platforms that provide functionality for the issuance of tokenized securities and their further management, up to communication with investors.
A non-standard, but quite reasonable use case for DeFi is the transfer of control over the lottery prize fund to a smart contract on the blockchain. That being said, it is easy to link the lottery app with other dApps to create a truly complete structure.
Participants pool their funds into a single pool, then the total capital is transferred to the DeFi lending application. The resulting interest is transferred to a random winner at a certain interval. As soon as the winner is determined, the smart contract returns to everyone his contribution – thus, the lottery is a win-win.
An example of such a protocol is PoolTogether.
Portfolio management implies the control of existing financial assets and their redistribution in order to maximize income. It happens:
Some DeFi projects help implement decentralized passive portfolio management. Thanks to transparency, the user always sees how his funds are being managed and what income and expenses may be incurred.
An example of a service for managing an investment portfolio: TokenSets (https://www.pooltogether.com/) .
Many jurisdictions prohibit gambling and the event betting industry (sports matches, elections, or other events). Therefore, a kind of decentralized prediction market has formed. An example of such a platform is Augur , where anyone can place bets on certain events, as well as sell or buy shares of potential profit. And the Numerai platform uses artificial intelligence and algorithms to predict transactions. You can bet on any of the predictions, and the amount of reward depends on the initial amount and the accuracy of the prediction.
Despite the fact that applications are open and accessible to absolutely everyone, one of the main problems can be called their mastery by users. Blockchain developers are now primarily working on this. For instance:
The developments are emerging very actively, and there are already answers to all the common difficulties encountered by users. There is no doubt that over time there will be an application that combines all the user-friendly features at once.
Despite all the advantages, there are also dangerous sides to decentralized finance. This is understandable, because the technologies used are relatively new. The main risks include:
There is a lot of buzz around DeFi at the moment, so some believe that this is all a bubble, as it was in 2017 with the ICO boom. But the direction seems so promising that it must be assumed that soon the HYIP will calm down and the technologies will begin to be systematically applied in practice.
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The topic of decentralized finance is almost endless, we just went to the top and covered the main aspects. Today, hundreds of applications in this area have been created and are successfully working. Some have become quite popular in a matter of months, like Compound or Uniswap . The potential of DeFi has not been ignored by large companies, for example, the Binance exchange found it necessary to launch a decentralized platform Binance DEX.
DeFi applications and projects can be extremely useful to residents of countries with weak or unstable economies. For example, in Argentina, it was even proposed to give people a salary in DAI in connection with the horrific inflation of the national currency. Services are in demand in developed countries as well, since they offer a more profitable and affordable lending system and open up new opportunities for interest income from investments.
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