What is DeFi?
DeFi stands for “Decentralized Finance”, goals is to provide an alternative solution to the traditional financial system without the middleman. Currently, DeFi has expended to many different sectors such as borrowing, lending, derivative products. Besides buying and selling of securities, can now be done via smart contract on a decentralized platform.
Most of the DeFi’s are based on Ethereum blockchain. During 2017, ICOs were running on ETH blockchain. ICO’s was used in order to raised funds to launch a project. The majority of the project just had a whitepaper and a goal of disrupting the industry with the blockchain.
What are the DeFi use cases?
The origin of the DeFi can be associated with the fact that in the early stage of cryptocurrencies. There was a very little solution for fiat to crypto or crypto to fiat gateway due to banking and regulations clarities. With cryptocurrencies being volatile, it gave birth to stablecoins. It aims to mimic the price value of fiat currency such as USD or Euro for example. Today we have many different stablecoins such as UDTS, BUSD, USDC, DAi and many more.
Currently, the DeFi is trading with a $9.4 Billion and currently only represent 2.45% of the total crypto-sphere market cap of $388 Billion.
The common DeFi industry Use cases:
Decentralized exchanges remove the needs of a centralized third party to validate an exchange between a buyer and a seller. The idea was to eliminate the needs to custody users funds in a third party platform. As result, enabling the user to transact from his own wallet directly with the buyer/seller using a smart contract. Therefore eliminating the risk of hacking which has occurred on multiple occasions throughout the years.
The following had lead to decentralized exchanges such as , Uniswap, Uni Curve and Balancer.
Borrowing and Lending
Imagine, you can borrow without a credit score or detailed banking history from anywhere to everyone. Now this is exactly what DeFi is offering by enabling users to borrow without having even a bank account. The Lending system is all bases on smart contract that calculate interest rates based on supply and demand using sophisticated algorithm. The DeFi lending and borrowing start to take momentum during the bear market between. Providing a perfect solution to crypto holders to generate an additional income by staking their coins in a Lending platform with the promise of earning interest for parking their coins on their platform. Lending and Borrowing initially focuses on stablecoins. As a result, the lender or the borrowers is transacting with stablecoins such as DAI.
One of the leading platform are Maker and Comound.
The advantage of centralized exchanges is the constant liquidity, which in most cases creates by liquidity provider or market maker. The following ensures that the order book for buying/selling is always full at is quoting the latest price. Market makers are paid for their services for providing constant liquidity and preventing slippage.
In order to encourage liquidity on decentralized exchanges, Compound on June 15th 2020, launched YIFI. The system award users with tokens for providing liquidity. The following has seen a tremendous success were other Defi protocol has copied the following system. For example below, we can see that UniSwap incentive for users to provide liquidity. Please take into account that the APY is constantly changing and will likely be lower with time.
Decentralized Prediction Markets, Options and Insurance
In simple terms, they are a ”gambling” platform for users to take bets on anything.
As the following platform are decentralized they are using decentralized oracles to validate the bets, all through smarts contract. The beauty of it, it removes completely the needs to trust the platform, users now only need to trust the smart contract.
One of the leading Decentralized prediction platform is Augur.
Synthetic Asset Bridges
Enabling cryptocurrencies that don’t have a smart contract on them to use bridge protocol that will enable to use a smart contract for the purpose of collateralizing them and earn some interest on them.
Ren Project is one of the leading protocol that offers cross-chain blockchain to be able to be collateralized, by supporting BTC, BCH, ZEC and more.
With a project such as YFI generating 94516.6% in less than 2 months, as of 2nd of September 2020, this definitely reminds us of the ICO mania of 2017. Even though DeFi is really revolutionizing the traditional finance, we advise trading with cautions when it comes to yield farming. As one of the risks that might occur is investing in a YFI project is a faulty smart contract. Many smart contracts auditors try their best to audit as many projects as possible. However, auditors can’t verify the legitimacy of all the latest DeFi smart contracts. Defi protocols and projects are still new industry and risk of collapsing without a proper oversight.