29 June 2020
What is DeFi?
DeFi (Decentralized Finance) is the merger between traditional financial systems with decentralized technologies such as cryptocurrencies, dApps, and blockchain. It is an ecosystem made up of blockchain-based applications to facilitate permission-less financial services.
DeFi aims to open traditional financial services to everyone. Imagine being able to access all financial services (loans, savings, trading, insurance, etc) from anywhere globally with just your smartphone and a good internet connection.
Difference Between DeFi and Traditional Financial Services
Several characteristics distinguish DeFi apps from traditional financial services like banks. They include;
DeFi applications tend to be open-source, and for a good reason. Compared to private codes, open-source codes are far more stable. The codes are freely available to the public, and anyone can audit and validate their functionality, security, and capabilities.
Besides being more stable, open-source codes provide more confidence in a platform because users can access all vital information. There is no reason to worry about malicious coding.
One of blockchain’s greatest advantages is transparency. All activities are made public. DeFi applications, as they operate in the blockchain network, also get to benefit from transparency.
While transparency might raise privacy issues, transactions with DeFi applications are pseudonymous by default. Unlike traditional bank accounts, transactions are not tied to anyone directly.
3. Global Audience
DeFi apps are designed to be global from day one. Regardless of your location globally, as long as you have a smartphone, computer, or laptop and a good internet connection, you can participate in DeFi platforms. DeFi apps are designed to be available to anyone with an internet connection.
DeFi apps have the potential to provide financial services to almost everyone in the world. Their ease of access and usage makes them viable for people in remote areas. These are people who, for the longest time, have had zero to minimal access to financial services.
The DeFi sector operates without any gatekeepers. Anyone can create DeFi applications. Also, anyone can participate in DeFi apps. Unlike traditional financial services, there is no myriad of verification systems that make it hard to participate in the sector.
The open nature of the DeFi environment enables developers to exercise more flexibility in their platforms. Users can use a third-party user interface if they don’t like the user interface of their current dApp. If they have the skills they can even create their own interfaces.
DeFi applications allow for seamless integration therefore make it easy for new DeFi apps to be built by combining other DeFi products. Interoperability ensures as more developers join the space, all the previous work is not lost.
Benefits of DeFi
Built on top of a blockchain, DeFi applications enjoy all the benefits of blockchain technology. Some of the benefits of DeFi include;
Decentralization enhances the security level of DeFi applications. It also enables worldwide participation in the apps. Anyone anywhere on the globe can participate in the platforms. Moreover, decentralization eliminates the need for and reliance on third parties.
2. Speed and efficiency
Without intermediaries and with automation in play, financial transactions get faster with DeFi apps. All people need is a good internet connection and hardware for a direct transaction.
3. Low-cost transactions
Without intermediaries cost of transactions also goes down. Direct transactions tend to have lower transaction fees than transactions that involve several intermediary services.
4. Full control of funds
Faults of DeFi
Similar to other new technologies, DeFi is not immune to “growing pains” that will inevitably fade away as time progresses, including:
DeFi applications are still in the novel stage. Bugs in smart contracts are hard to identify and may take a considerable amount of time to solve. Plus, their reliance on the internet makes them susceptible to internet vulnerabilities. There have been cases where DeFi applications have been hacked or needed to shut down due to bugs.
Vulnerability to Human Error
With DeFi applications, it is vital users keep their private keys secure and private to avoid losing their funds. Without the necessary security knowledge, users can easily lose their funds by misplacing or losing their private keys. Funds can also not be reversed once sent to a user.
Popular Types of DeFi applications
Decentralized applications became an investor favorite in 2020 with numerable opportunities to earn, ranging from interest from lending to staking. You can find these DeFi coins in these four locations:
1. Decentralized Exchanges:
Decentralized exchanges enable users to exchange currencies for other currencies. For example, you can exchange fiat currency for cryptocurrencies like Bitcoin.
Stablecoins are cryptocurrencies backed by physical assets for stability. They enjoy all the benefits of cryptocurrencies without their volatility vulnerability.
3. Lending platforms
Lending platforms use smart contracts to enable direct transactions that need no intermediary services.
4. Prediction markets
Prediction markets are full of costly intermediary services. DeFi apps can easily provide prediction market services with the intermediaries.
Top DeFi Projects
With a foundational understanding of DeFi, it’s time to dive into which projects are transforming the finance industry and quickly becoming investor favorites:
1. Uniswap (UNI): A decentralized exchange that operates on the Ethereum blockchain that enables investors and traders to exchange (or “swap”) ERC-20 tokens on a peer-to-peer basis
2. Aave (LEND): An open-source protocol and cryptocurrency token that lives on the Ethereum blockchain, where users can earn interest on deposits that they make available for others to borrow.
3. Kyber Network (KNC): A decentralized exchange, which has become ones of the fastest-growing token projects in 2020, that enables individuals to trade Ethereum and ERC-20 tokens instantly with low fees.
4. 0x (ZRX): Similar to Uniswap, 0x (ZRX) is a decentralized exchange that enables traders to exchange ERC-20 tokens
5. Echo (ECHO): Smart contract development platform built to deliver scalability to the Bitcoin blockchain.
6. Compound (COMP): Ethereum-based protocol, or set of rules that govern data on the blockchain, that enables people to earn interest on cryptocurrency by enabling users to add their holdings to liquidity pools that others can borrow from
7. OmiseGo (OMG): Proof-of-stake (PoS) platform, built on the Ethereum blockchain, that is focused on creating a decentralized payment system and open financial system
8. Syscoin (SYSX): Peer-to-peer platform that enables individuals and businesses to trade goods and services, or even process payments, with almost no cost and heighten security for the transactions
PRotocols (No Tokens)
1. Connext: Peer-to-peer micropayment system that syncs producers of content, services and data directly to the consumers. This protocol is focused on addressing the issue of major platforms, such as Facebook and YouTube, that profit off of original content and data produced by its members.
2. Request Network: Peer-to-peer payment system built to streamline invoicing across businesses
3. Dharma: Open-source savings accounts, built on Compound, that allows users to earn internet on money held in their non-custodial “smart wallet.” Dharma is known to be one of the easiest ways for new investors to become involved in DeFi
4. Nuo Network: Decentralized platform on Ethereum that directly connect borrowers and lenders through smart contracts
DeFi will go a long way in building an open financial system. While the decentralized finance market is currently a drop in the ocean when compared to traditional finance, it’s expected to snowball. With more projects and financial dApps, in the near future we can anticipate a decentralized financial reality where conventional finance services interoperate with cryptocurrencies and blockchain in perfect sync.