• Jagraj Singh

Decentralised Finance

Decentralised Finance, commonly referred to DeFi, is a branch of the cryptocurrency space geared towards providing open alternatives to the financial services we have in everyday life. The aim is to increase accessibility for services such as loans, insurance, and savings, while maintaining decentralisation. By this, I mean that there isn't a single, core entity controlling everything, cough banks cough. Essentially, you are your own bank!


DeFi is made possible because of its utilisation of smart contract blockchains, such as Ethereum. These smart contracts allows decentralised applications (dapps) to run and execute specific instructions when certain criteria are met by the user. This functionality means developers can create more advanced programs and gives cryptocurrency a further dimension beyond just sending and receive the currency.


As of the time of writing, there are active applications and protocols which allow you to lend out money, earn interest on crypto, take out loans, leverage trade, and even create/mint stablecoins representing the value of the dollar.


Advantages:


Decentralisation - The main advantage of DeFi is the fact that it's decentralised. Instead of the operations of the protocol being controlled by a company, it is entirely dependent on computer code, so less liable to error. Also, because it is based on smart contract tech, there is less maintenance that is needed to sustain and manage the dapp, aside from bug fixes and major updates.


Transparency - Another positive is that the code behind the dapp can be audited and checked by anyone anywhere as it is available on the blockchain or GitHub repos. This again reinforces the idea of trust between the dapp and the user, because the protocol can be understood by everyone, allowing a better spread of knowledge ultimately.


Interoperability - Unlike the traditional financial system, DeFi applications are built to be multi-purpose and combine with other likeminded applications to create larger ecosystems and more utility. Entirely new products and protocols can be formed to provide further ease of use for the user at the end of the day.


Disadvantages:


Responsibility - Despite DeFi taking the world by storm, all responsibility falls on the user. Unlike services such as BlockFi, Nexo, and Celsius Network, there is no one to hold responsible for any exploitation, hacks, or scams carried out by projects posing to be credible. Is this risk justified for users to employ these protocols and dapps, who could be less informed or new to cryptocurrency and DeFi on the whole? In short, there is risk, so always do your own research.


Projects:


Borrow and Lending - The main player in this area of Defi is Aave, who have successfully built up a strong ecosystem with a market size of over $4 billion at the time of writing. A competitor to Aave is Compound. These protocols are the decentralised versions of centralised finance options such as BlockFi, Nexo, and Celsius Network.


Stablecoins - The dominance and technology of Maker is to be admired. Maker is behind the main decentralised stablecoins, Dai. The amount of Dai however is regulated through the use of their native token, MKR. In accordance to there being too much or too little Dai circulating, the MKR token is minted or burned to self regulate this.


Automated Market Maker - These protocols, such as Uniswap, allow you to trade tokens that you own for other tokens. A special mechanism called automated market making is used to automatically settle trades at close to the market price. AMMs are also referred to DEXs (decentralised exchanges), where liquidity can be provided in order to earn/farm a share of the exchange fees for that contract.


Synthetic Assets - Synthetix is a derivatives based liquidity protocol, allowing anyone to gain access and exposure to a range of assets including gold, silver, and traditional currencies. These assets are backed by collateral held in the Synthetix smart contracts.


Summary:


There's a lot of potential with DeFi. It will definitely be interesting in seeing how the space evolves during this decade heading into 2030. From personal experience, using dapps for DeFi protocols such as Aave provide a better overall experience than the current financial system does.


DeFi Pulse allows you to monitor and see just how much money is locked up in these DeFi protocols. At the time of writing, the total value locked is $57.65 billion. If you wish to bet on DeFi doing well (why wouldn't you?), DeFi Pulse also have their own native token, DPI. This is a basket of several DeFi project tokens (MKR, AAVE, SNX, COMP, etc) put into a bundle basically. It's like an index fund but for DeFi.


Currently DeFi dapps rely on the user already holding the crypto and providing it as collateral. Could this change and be developed further and advanced? If so, how? If someone can answer that and build a dapp for it, they may just be onto the next big thing in DeFi.


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