Throughout history, financial intermediaries have been the link between buyers and sellers, making it possible for goods and money to be traded and moved between markets. The middlemen, such as brokers or banks, take a cut along the way, which is fair since they help make financial transactions possible.
These centralized financial institutions make huge deals with each other that take advantage of whole markets and give them huge profits that the average person could never get. In this world, it's not about who you know but how much money you have in this world.
DeFi is a popular topic in finance right now, and for a good reason. It's going on right now. The development of decentralized finance (DeFi) or "open finance" was a turning point in finance history. It became well-known in the summer of 2020 when yield farming and the rise of tokens like Compound and Sushiswap, which promised traders good returns, made it popular.
What is DeFi (Decentralized Finance)?
Launched in 2015 on the Ethereum blockchain, DeFi uses blockchain's distributed ledger technology and is growing quickly. Its main goal is to grow and run without traditional intermediaries like banks, payment service providers, or investment funds. However, it still needs to be able to offer financial services like loans, margin trading, and portfolio management, just like traditional banks and investment firms.
DeFi is the idea that traditional financial instruments can be made to work in a decentralized way. In other words, using blockchain technology to make new versions of common securities and systems in the traditional banking sector. Coinbase says that this is now possible with the help of smart contracts, which make it possible for developers to build much more complex functions than just sending and receiving cryptocurrency. This is done with Dapps, which stands for "decentralized apps."
The Dapp Compound is a great example of this. It takes the traditional money market fund and makes it with blockchain technology. Users can put their assets on Compound and earn interest in them. At the moment, putting Ether in Compound gives a net return of 0.67 percent. Users can also borrow ETH at rates as low as 2.61 percent through the platform.
Unlike most money market funds, Compound isn't run by a single organization. Dapps like Compound have improved efficiency and transparency, which makes returns better because traditional middlemen are no longer needed. Also, it's important to know that the value of all the money locked up in DeFi has gone through the roof in the last 90 days.
DeFi's growth can be explained by the fact that people like it. To access financial products on public, decentralized blockchain networks, people don't need a government-issued ID, a social security number, proof of address, or anything else like that. However, it is important to note that as DeFi projects like crypto wallets and exchanges grow, regulators will likely require KYC (Know Your Client) and AML (Anti-Money Laundering) procedures to be in place. This means that a government-issued ID is still needed for some of the larger platforms.
Open-Source
Decentralized technology is open-source, which means that anyone can use the code to build the same project or build on top of it. The future is limited only by your imagination.
Transparency
The code is on the blockchain, where anyone can check it, and this makes it easier for people to trust each other. All transactions can be seen on the blockchain, but they are not tied to real-world identities.
Permissionless
DeFi apps are completely open-source, so anyone can build or use them, and there's no need to fill out a lot of paperwork.
Interoperability
By putting together other projects into super solutions, you can make custom DeFi applications.
The growth of DeFi in the years that followed
DeFi is an exciting new idea. It is the rapidly growing ecosystem of blockchain-based financial products that try to copy or expand the functions of traditional financial institutions like banks, payment processors, clearinghouses, and more. DeFi is portrayed as a solution to the problems that traditional banks and financial institutions face, and it shows how it may eventually replace the old system in real-time. No matter what technology or platform is used, DeFi systems are made to get rid of the need for intermediaries between the parties involved in a transaction.
The amount of tokens and money locked in smart contracts that are traded in its ecosystem has been growing quickly, which shows that this idea is here to stay. DeBank says that there is about $60.5 billion in net value locked up in DeFi right now.
DeFi makes it easy to take care of financial transactions. As the name suggests, it is not subject to government laws or changes made by centralized financial institutions. This gets rid of the need for third parties and gives users full control over their transactions. Since all transactions are done through smart contracts on the blockchain, users can also stay anonymous. Cryptocurrency transactions and trading can be done from anywhere because it makes money accessible to everyone.
The difference between DeFi apps and traditional banking
The main difference is that anyone anywhere can use Dapps. Anyone with an internet connection can use DeFi networks, no matter what the rules are in their area.
Businesses that use DeFi aren't run by institutions but rather by smart contracts that are written in code that can be run.
Smart contracts are programs that run on the blockchain and can run automatically when certain conditions are met. One benefit of smart contracts is that the code is public and can be checked by other people. Users can also see transactions, and everyone can see everything that is going on.
Lastly, DeFi applications are getting better at working with other DeFi products. For example, decentralized exchanges, stablecoins, etc., can be used to build new applications, and these can be put together to make new products and services that can be used in different ways.
Why will DeFi take over the whole world?
Over the years, the decentralized finance sector has grown by leaps and bounds. In the case of GameStop and WallStreetBets, the crypto and DeFi functions are taking baby steps into the traditional finance world.
At some point, the question isn't whether DeFi will be a big part of the global economy but how creatively it will be developed and how much of a force for good it will become.
Adding advanced decentralized artificial intelligence will be a key part of guiding DeFi in a good direction. AI hasn't been used in many DeFi projects so far, but it could be a part of the next wave of DeFi activity later in 2021, and it could even help DeFi move startup decentralized technical projects forward with much more speed and purpose.
DeFi applications solve the same problems for crypto users that traditional financial institutions solve for the fiat-based economy. DeFi lets users access digital capital in the same way that banks, brokerages, and stock exchanges help people access fiat capital.
Developers have already created decentralized exchanges (DEXs) that let users trade digital assets, stablecoins that act as proxies for fiat currencies, lending platforms that help entrepreneurs and investors borrow money, and prediction markets that let users bet on real-world events. Uniswap, a decentralized trading protocol with guaranteed liquidity for millions of users, is one of the most well-known DEXs.
But there is one big difference: the way power is spread out. Because no one person or group has full control over the system, the system is more reliable, safe, and trustworthy. Last week, Robinhood stopped its users from buying certain stocks but let them sell them. This shows how centralized systems can change the rules and put users at a disadvantage. Many of Robinhood's competitors also changed their rules on short notice, which cost investors billions of dollars overnight.
Effects of the DeFi Revolution on Bitcoin and Cryptocurrency
DeFi gives the crypto community more features and liquidity, which makes crypto assets worth more in the long run. We think that bitcoin and DeFi assets are a great fit for each other and that they help each other out. Also, "proof of work" and "proof of stake" Smart contracts are the key to blockchain's full potential, according to DeFi.
As more people see how weak and unfair the traditional financial system is, decentralized systems may also become more popular. In the long run, this should encourage more people to use the technology and raise the market prices of these cryptocurrencies.
The popularity of DEX is on the rise.
In the last few years, Decentralized Finance (DeFi) has been able to make a big difference in the world of finance. Transactions on DeFi and Decentralized Exchanges (DEXs) on the blockchain network have become very popular because they cut out middlemen.
With the help of a technology called "Automated Market Makers" (AMM), DEXs can have deep liquidity by offering asset-specific liquidity pools instead of order books like centralized exchanges. Users can make these assets liquid by putting them in these liquidity pools, and they can make a lot of liquidity passively by charging fees to trade.
DeFi companies don't need intermediaries or custodians to offer services like buying, selling, lending, and borrowing crypto assets. This is in contrast to centralized financial services like traditional banking. Users of DEX can trade or get services by interacting directly with the blockchain protocol. This non-custodial structure of a DEX means that users can keep ownership of their cryptocurrency and have full control over their wallet assets. DeFi and DEXs use "smart contracts," which are self-regulating computer programs that run on a blockchain network.
Most DeFi projects are built on the Ethereum blockchain network because it was the first to give developers the tools they need to build these kinds of decentralized apps (DApps). But new blockchain networks like Solana, Cardano, Polkadot, and others are being built and are slowly making the DeFi space more competitive.
Even though DEXs and DeFi projects are hard to understand and take a long time to learn, they are slowly becoming a profitable option for SMEs and startups in the FinTech space around the world. With low entry barriers compared to traditional finance, DeFi and DEXs around the world make it easier to get cheaper credit and easy lending and borrowing, changing the way traditional finance works.
What are the digital assets powering the DeFi revolution?
In 2008, when the Bitcoin blockchain came out, the revolution started. Satoshi Nakamoto is the person who made it. DeFi takes Satoshi's idea of peer-to-peer electronic cash and expands it to include lending, trading, investing, managing risk, and other things. It is built on distributed networks instead of corporations. To be clear, DeFi is not a type of financial technology. Even though fintech applications are important, banks and other intermediaries are still needed to build trust between parties, check account balances, and handle the business logic that makes the system work, such as clearing, settling, contracting, and so on. And in the end, most fintech innovations are just digital wallpaper—a sleek user interface that hides the old system underneath. Instead of just slapping on a new coat of paint, DeFi rethinks finance from a networked point of view with digitally native assets or tokens.
1. Cryptocurrencies (aka digital money)
Bitcoin is the first cryptocurrency. It has tens of millions of users and more than $1 trillion in market capitalization. It works like money on the internet and is the last layer of settlement for the crypto-economy. It's digital gold for investors and a lifeline for a lot of people in the world who don't have bank accounts. In this role, Bitcoin is the only choice.
2. Protocol tokens
These are the native tokens of the platforms that make DeFi and a lot of other things work. Ether, the native token of Ethereum, AVAX, the native token of Avalanche, SOL, the native token of Solana, and ATOM, which is the native token of both Cosmos and IBC, are all good examples. Joel Monegro, a venture capitalist, calls them "fat protocols," which means that they get a lot of the value created at the application layer, which is built on top: They make up almost a trillion dollars' worth of the market value of crypto assets.
3. Governance tokens
Governance tokens like Uniswap's UNI, Aave's AAVE, Compound's COMP, and Yearn Finance's YFI give holders a say in how decentralized autonomous organizations (DAOs) and decentralized applications (dApps) are run, specifically how resources from a common wallet are distributed. As dApps get more users and assets, their governance tokens often go up in value because the amount of money they control goes up, and their fees go up as well. For example, the native token of the decentralized exchange Uniswap, UNI, is worth more than $11 billion.
4. Non–fungible tokens (NFTs)
NFTs are unique digital assets that can be shown to be scarce. They also provide a way to prove these assets' scarcity, origin, and ownership. They can also stand for things like sports memorabilia and expensive goods. Today, they are mostly used in games to store art, collectibles, and digital assets. In the end, they can be used as identities to show ownership of intellectual property and of many other kinds of virtual goods. NFTs have become very popular very quickly. In August 2021, more than US$3.4 billion worth of transactions were made on the NFT site OpenSea.
5. Exchange tokens
Centralized exchanges like Binance and FTX have their own crypto-exchange tokens, like BNB and FTT, which are worth $80 billion and $7 billion, respectively. These tokens are most necessary for the exchange to work and encourage people to use them. However, they are managed more centrally and give no governance rights. BNB is both an exchange token and the native token of the layer-1 Binance Smart Chain, so it can be used for two different things.
6. Securities tokens
There are three types of securities tokens: digitally native securities like DeFi investment funds, synthetic securities like Mirror's google or MLA, and securities tokens created by traditional financial institutions like investment banks or asset managers. They are changing the stock, bond, and derivatives markets.
7. Stablecoins
Stablecoins, like USDT, USDC, DAI, and UST, are digital assets with a stable value usually tied to the U.S. dollar. Stablecoins use different ways to keep their value stable, and their total market value is now more than US$130 billion. Centralized stablecoins are backed by cash and cash equivalents deposited in banks or other financial institutions. Most of the time, crypto-assets held in smart contracts are used to back up decentralized stablecoins.
8. Natural asset tokens
These are digital assets that are backed by real things like oil or gas, land, or carbon. For example, the blockchain-based ecology network Regen connects land stewards who protect and preserve ecosystems with buyers of offsets through the Regen registry. This brings transparency, liquidity, and verifiability to the carbon credit market.
9. Central bank digital currencies (CBDCs)
Central bank digital currencies (CBDCs) are crypto versions of real money, like the digital renminbi from China and the digital won from South Korea. Proponents say that they could make things easier, more stable, and give more people access to money. Opponents say that they could be used for mass surveillance and political repression.
The bottom line
Decentralized Finance (DeFi) has become a game-changer for cryptocurrency and brings in a lot of people. It lets people avoid paying high fees and lend their money to other people while earning interest on the assets they own. The number of DeFi projects shows how far the DeFi revolution can go, upsetting traditional ways of lending and giving consumers more power.
There is no doubt that DeFi is becoming a major player in the financial world today. It's not about giving speculators new toys to play with or giving people who don't want their money controlled by a central government more advanced financial tools. DeFi has the potential to be much more than this, but the key to having a really big impact will be to expand DeFi beyond Bitcoin (BTC) and Ether (ETH) to other cryptocurrencies with less liquidity.
Since 2020, DeFi has spawned a large network of platforms and protocols that let users swap, trade, deposit, borrow, and lend cryptocurrency for income and growth opportunities. This kind of chain reaction hasn't happened in decades in traditional financial markets.
Real-time News
