All about Decentralized Finance
All about Decentralized Finance
DeFi or Decentralized Finance is the integration of traditional banking services with decentralized technologies such as Blockchain and can also be called “Open Finance” due to its pervasive format. DeFi developers are currently trying to create an alternative to any existing financial services, including savings and checks, loans, asset trading, insurance and more.
DeFi protocols
In the defense system, markets are always open and there is no centralized authority that can block payments or deny you access to certain services. Services that used to be very slow and prone to human error are now operated with code that anyone can check, and best of all, they are automated and more secure.
What DeFi currency code means?
There are many projects that are providing services in the field of defense. Each of these projects has its own token or cryptocurrencies that can be used for different purposes. These tokens are actually called cryptocurrencies. Brief history of DeFi
Decentralized finance (DeFi) came to life in 2009 with the introduction of bitcoin into global markets. Bitcoin was the first peer-to-peer digital currency and also one of the first financial applications based on Blockchain technology.
The turning point and the biggest advantage of decentralized financial programs is that it provides much more services to users to use their money and assets, and like traditional methods, its only use is not to send money from one person to another. These services were made available to users in 2017 with the launch of MarkerDAO.
MicroDao is an Ethereum-based protocol that allows users to use digital assets as collateral to issue a currency code worth US $ 1. This mechanism effectively allows anyone to exchange the Dai stable with the ether token, which is a native platform token.
This method allows people to get a loan without relying on centralized institutions. It has also created a dollar-dependent digital asset that does not force people to keep dollars in StableCoin or Tetra banks.
The Microway Loan Protocol and Stable Quinn Dai provided the first elements of a new, open, unlicensed financial system. Since then, other financial protocols have been launched, creating a popular and interconnected ecosystem.
Released in September 2018, Compound Finance created a marketplace for borrowers through which they can borrow without the need for centralized organizations, and lenders can receive some interest on the interest rate on these loans.
Launched in November 2018, Uniswap allows users to exchange any token with Ethereum without the need for a license.
It is now only three years since the creation of MicroDao and now there are dozens of DeFi programs that offer many possibilities such as lending, trading, creating artificial assets and several other items that can be easily used by anyone in Put around the world.
DeFi vs. traditional finance
Here are some differences between DeFi and traditional finance:
- In traditional finance, some people are not allowed to set up a bank account or use financial services.
- Lack of access to financial services can prevent people from being employed.
- Financial services can prevent people from accessing their rights.
- Your personal information is available to them.
- Centralized governments and institutions can shut down markets at will.
- Trading hours are often limited to the business hours of the area.
- Money transfer due to internal human processes may take days.
- Financial services receive an amount as an intermediary fee for institutions.
How does DeFi work?
DeFi uses digital currencies and smart contracts to provide services that do not require intermediaries. In today’s financial world, financial institutions act as guarantors of transactions. This gives companies tremendous power because your money flows through them.
It should be noted that billions of people around the world do not have access to these financial systems and cannot even create a bank account.
In DeFi, a smart contract replaces the financial institution in the transaction. A smart contract is an Ethereum account that can hold funds and can send or repay them under certain conditions. After writing a smart contract, no one can change or edit it, and this contract is always executed according to the plan and without any interference.
For instance, a contract designed to pay a grant or out-of-pocket money could be scheduled to send a specified amount of funds from account A to account B every Friday; this transfer will only take place if account A is sufficiently valid. No third party or hacker can change this contract to steal funds to their account.
Contracts are also for public inspection and auditing; this means that bad contracts are often scrutinized quickly and will not work.
That’s why more people who can read this code need to join the platform to significantly increase network security. An open source community helps control developers a lot, but as smart contracts become easier to read and other ways to prove code reliability develop, this need diminishes over time.
What can be done with DeFi?
The following is more about the applications of DeFi:
Borrowing
Like many existing financial services, loans and borrowings play a key role in finance. Users who are looking to make a profit from their capital can deposit their funds into a pool; although the function of these pools is the same as in traditional markets, these pools do not block funds and the user can withdraw his funds whenever he wants. This creates a high level of liquidity in the system that allows borrowers to participate in these pools whenever they wish.
Prominent lending services that use decentralized finance include Compound, Aave, Maker, and Atomic Loans. Compound has recently grown significantly with the introduction of its COMP token.
Investment
Investing and generating income through this is probably one of the most attractive parts of financial services. Buying and selling digital currency is definitely on the rise among traditional investors. Using DeFi, users can invest in gold stocks or any other asset they want.
This is done through a series of synthetic assets or digital synthetics that allow users to invest in shares of companies such as Tesla or Apple.
Insurance
Given that the DeFi system is still very new and has not been released for a long time, this platform still faces many challenges. That is why insurance plays an important role in ensuring the security of users.
Two prominent examples of insurance service providers in the DeFi platform are Nexus Mutual Insurance and Opyn. In order to be able to protect your property against unforeseen damages, it is better to insure them as soon as possible.
Nexus Mutual Insurance logo
Decentralized exchanges
The development of decentralized exchanges is probably one of the first uses for DeFi. Decentralized exchanges provide users with the opportunity to freely exchange their digital assets across different operating systems. Users can use these exchanges without providing their identity and details or even registration.
Decentralized exchange is a great platform for users who want to trade digital currencies. At the same time, these exchanges earn passive income by providing liquidity to the markets.
Centralized exchanges operate on the basis of public trust; People either trust these exchanges themselves or the people who run them. In contrast, in decentralized finance, investors no longer need to look for a money changer or a trusted third party using Blockchain and smart contracts.
Decentralized systems are therefore a reliable platform where the security of the assets of both parties to the transaction is guaranteed and the execution of the transaction will be at a price agreed by both parties.
Centralized exchanges
Centralized Bitfinex and Poloniex exchanges allow users to margin their cryptocurrencies. Margin is the initial guarantee for starting a trade, which is calculated on the basis of leverage.
The borrowed funds market is embedded in the stock exchange, and users can deposit their assets and capital in this market to receive loans. In centralized markets, there are security risks that threaten investors’ funds, or the main exchange network may be hacked, or, worst of all, the founders may leave the network before the funds are repaid and the entire system may be destroyed.
For this reason, by decentralizing the borrowing and lending market, users can lend or borrow to each other through a peer-to-peer system; in fact, other investors; So by decentralizing finance on some platforms, users turn the market into a large collection of liquidity through a peer-to-peer system where users can lend or borrow money to other investors around the clock, and deposit or withdraw.
The most popular platform that uses Blockchain technology for lending and lending services is Mikroo. In MicroDao, for example, the user sends ether to the system as collateral and receives it in exchange for Dai Quinn. If the price of ethers deposited in the system drops by more than 150%, the investor must repay the loan he has taken and repay his ethers.
One of the main advantages of these decentralized and peer-to-peer systems is that the whole process and its liquidity are completely transparent and both parties to the transaction are fully aware of the whole process.
Payments
All financial services have their role and importance in such systems, but payments are more important because they gain people’s trust in such financial affairs. DeFi payments will be much easier on the operating system and users can easily make them through their laptop or mobile phone.
Benefits of decentralized finance
In the following, the most important benefits of DeFi are examined.
Decentralization
Decentralization is one of the most important aspects of digital space. The code of such operating systems is not written by institutions and in fact there is no institution to control them. These codes are written through smart contracts and deployed in Blockchain. Anyone with the least knowledge of coding can write these contracts, and no organization or individual manages or controls them.
Transparency
In the Blockchain space, users have all the necessary facilities and services to trust the security and performance of this system. The transparency of the code in the Blockchain allows everyone to see and audit it. At the same time, the question arises that if all Blockchain transactions and contracts are transparent, the privacy and identity of the user will not be compromised? No; although all transactions are transparent, the user trades with an anonymous code and does not endanger your privacy.
Global
Globalization is one of the most interesting features of DeFi, because with the help of this financial system, you will have access to DeFi services wherever you are in the world, if you have access to the Internet. Users are not geographically restricted from using DeFi services, and you can access these operating systems via VPN, even if your area’s IP address is blocked.
But traditional financial services are geographical. For example, a North Korean citizen is unable to open a bank account in Hong Kong. Aside from geographical constraints, most wealthy people use traditional services. In this way, customers who have more assets and capital usually benefit from better rates and services. DeFi minimizes this inequality and users can use the same services regardless of their capital.
No authorization or permission is needed
Another important feature of the DeFi platform is that anyone can use its programs and services. Users do not need to interact with a financial institution and instead can interact directly with their smart contracts and smart wallets.
Flexibility
Flexibility is one of the most important reasons for the popularity of decentralized finance. For example, if a user is not satisfied with the user interface of a decentralized application, he can use another user interface or even create it himself. Flexibility allows users to choose and modify DeFi services to suit their needs.
Disadvantages of DeFi or decentralized finance
There are also cons in DeFi as follow:
Unknown and doubtful
If the Blockchain that hosts the DeFi project is unstable and unknown, the project itself will inherit this instability from the host Blockchain. Ethereum Blockchain, for example, is still experiencing changes and instability. Mistakes that occur when changing the Ethereum Consensus algorithm from Proof of Work (PoW) to Proof of Stocks (PoS) can cause countless problems for DeFi projects.
Scalability
Another major problem with DeFi projects is the scalability of the host Blockchain. The two main problems that can arise from scalability are that it can take a long time to verify transactions, and the other is that transaction costs are very expensive when the network is busy.
At its full capacity, the Ethereum platform can only process about 13 transactions per second, while its centralized counterparts can process thousands of transactions per second.
How to invest in DeFi projects
Here are ways of invest in DeFi projects:
Trading DeFi tokens
DeFi tokens are virtual and native assets used by DeFi operating systems. For example, the native currency of the compound is compound, and at the same time the native currencies of Microdow are maker and die, and like any other currency code, DeFi currencies can be traded in exchange offices.
Trading these tokens allows users to buy, maintain and sell them whenever they want, and helps users make a lot of money. Another reason for the importance of these tokens is that they are at the core of DeFi protocols and have great potential for development.
However, it is the best method to use for defense tokens, governance, sticking and so on. For example, it is called a UNI swap token (UNI), a sovereign token, and can be used as collateral for a loan.
Yern Finance cryptocurrency (YFI) also allows users to participate in Yarn Ecosystem Yield Farming. The use of such items increases demand, which ultimately, apart from supply, is the only factor that directly affects the price of an asset.
Extraction of liquidity
Liquidity Mining is the injection of liquidity into the DeFi protocol. Liquidity miners are constantly interacting with budgeted pools of liquidity. Cash providers (LPs) who receive a large share of the revenue generated are encouraged to join DeFi operating systems and help them operate.
Consider, for example, a DeFi lending platform. Alps receive a percentage of the revenue earned this way. In addition, depending on the operating system, ellipses are allowed to withdraw their funds at any time.
Although joining these platforms and becoming an ellipse is a lucrative business, keep in mind that there is always the risk of being fined for a mistake or unauthorized practice and losing all your capital.
The future of DeFi
We are witnessing a quantum bounce with inside the new opportunities of the functionalities of cash thru the innovation of allotted ledger technologies. For the primary time in history, a worldwide economic gadget for a global populace is being fashioned with the aid of using that very populace. Everyone can participate in the governance of DeFi protocols and get a seat on the desk in which the sector of decentralized finance is actively created.
Defi on Chain networks
The DeFi area is progressively catching up with the conventional economic gadget and no matter a number of the boundaries that are sure whilst working at the bleeding fringe of innovation, the sector of decentralized finance is at the route to prosperity.
Over time, it`s hard to expect how this area will form whilst the strength to construct economic offerings will democratize. However, on the factor in which DeFi and fintech map and merge, we`ll have an inflection factor in which nascent economic era is simply a part of a brand new economic gadget. One that realizes the dream of being fast, secure, available, and egalitarian.
