What is DeFi in Cryptocurrency
Cryptocurrency has been around since 2009 with a lot of innovations and projects intending to solve unique problems, this brings about DeFi. In this article, we are going to be looking at What is DeFi in Cryptocurrency.
Every year, blockchain developers try to come up with ideas that captivate the interest of people in the blockchain realm. One of the prominent goals of cryptocurrency is mass adoption with the process to do all we can do with fiat currency through the digital currency (cryptocurrency).
Why we are seeing enormous growths in cryptocurrency is because of its decentralized feature, which means it’s not controlled or owned by a single entity. A multi-billion dollar transaction can be accomplished within a few seconds at a cheaper rate with swift delivery.
In the year 2020, someone transferred Bitcoin worth $1.1 billion (₿124,946) with an $80 (₿0.0096) transaction fee and was successful in jiffies.
People crave freedom and an easy to use autonomous platform, therefore cryptocurrency is the future money, and that mass adoption is inevitable. We have seen miscellaneous corporations and individuals that chastised or ignored Bitcoin are now harnessing the digital currency.
The year 2020 saw transactions and investments in cryptocurrency from institutions and billionaires. And even Elon Musk that’s now the world richest tweeted a meme on Bitcoin which means he can hop into Bitcoin at any point in time, and who knows if he owns Bitcoin but he’s been a supporter of Dogecoin, one of the oldest altcoins.
DeFi busted up in 2019 on the Ethereum blockchain, which surges the rise of cryptocurrency markets and the advent of new platforms. DeFi has now grown into multi-billion dollar projects. In July 2020 the Total Value Locked (TVL) in DeFi was approximately $2.23B, the value grew from $2.03B to $2.23B within 3 days.
What is DeFi?
DeFi simply implies Decentralized Finance.
The word Decentralized is what makes the difference from centralized platforms. In a decentralized system, no single entity owns or controls it, transactions are documented on the blockchain/public ledger which incurs transparency, and transactions can be executed without an intermediary. In a
Decentralized system, no one can infiltrate the network, and this has been proven by Bitcoin. Ever since Bitcoin inception, it’s never been hacked and even the quantum computer that is vowed to come shortly is doubted to disrupt the Bitcoin network.
The word Finance is what we do traditionally in everyday life. It’s simply the management of money and other valuable assets. Traditional finance we all know and use is largely controlled by centralized bodies like Banks and Governments. In centralized financial institutions, we are plopping our trust in these institutions with our money or assets.
Our assets/money cannot be assessed directly without these institutions, which simply means they serve as an intermediary to our assets and these institutions lack transparency. We trust banks and that’s why we save our money with them; we trust the Government to control our economy and currency value, and when it comes down to investing, we trust the financial institution to handle our money responsibly.
Undoubtedly, this has not been working well and we don’t know how these institutions play with our money. This level of centralization is entrenching and affecting the present financial system, and that’s why we need an alternate solution. We need to take back our assets into our hands and that’s what brings out the development of DeFi.
After defining the words Decentralized and Finance, we can simply say DeFi is the management of our assets in the decentralized systems. DeFi is a transparent, trustless, and permissionless system. With DeFi, we are in control of our assets without a middle outfit.
Benefits of DeFi
Unlike traditional centralized financial institutions, DeFi
124,946 bitcoins were just moved in a transaction. That's ~$1,100,000,000 transferred for an $80 fee. No government, bank or third party has to verify, it is transparent and creates a trustless, and permissionless financial ecosystem by eradicating the middleman and it’s available to everyone who has access to a mobile phone or PC that is internet enabled saying that anyone can take part in DeFi.
DeFi allows users to take total control of their assets and users interact with the DeFi ecosystem through P2P decentralized applications abbreviated as Dapps from anywhere in the part of the world. Dapps are always open-source applications built on top of the blockchain.
These are blockchains like Ethereum that are not limited to sending and receiving money but a blockchain that allows developers to develop something known as Smart Contract. Another popular Blockchain offering DeFi is the Binance Smart Chain.
Smart contract is a code that runs automatically when certain conditions are met. Smart Contract enables developers to create incredible apps that allow users to interact with the blockchain independently, these apps are what we termed as decentralized apps or dapps.
Are you thinking of the features DeFi offers? Everything that can be achieved in the traditional financial institutions can also be achieved on DeFi like taking out loans. Yes, DeFi allows you to take out loans not from banks but another user on the DeFi network sitting in their house somewhere around the world.
DeFi programs are accessed on the PC through the Metamask Plugin and on mobile through Trust Wallet App. Trust Wallet App supports multiple blockchain ranging from Ethereum, Binance Smart Chain, Ethereum Classic, Tomochain, Thunder Token, and GoChain. While the present version of Metamask at the time of writing this article supports Ethereum and Binance Smart Chain only, other blockchains could be incorporated in the future.
Since DeFi emerged, there have been many dapps developed that suit different financial needs, which I’m going to mention below. These applications are currently live so hop on anyone that suits your needs.
Note, while DeFi is great and secure, there is also a risk involved. Before you permit a dapp to access your wallet or contribute to the DeFi ecosystem do your research to make sure you are in the right channel.
Borrowing and Lending
Technically, this is like the traditional financial institutions offering loans to businesses and individuals. What makes the difference is the transparency and absence of a middleman. DeFi loans are fast growing in the DeFi ecosystem because it allows crypto holders to lend their assets to another user and earn interest.
You can borrow money easily from anywhere when the conditions are met, as long as you have access to the DeFi lending dapp. There are different DeFi platforms with different rules. When you borrow money from the DeFi ecosystem, you sign a contract that shows some details like repayment period, the amount borrowed, interest rate, etc with the borrower.
How the DeFi loan works is that If you request for a loan, the DeFi will ask you to input an equal or higher amount greater than the borrowed amount, which serves as the collateral.
This is a platform built on the Ethereum blockchain that allows you to lend your cryptocurrency out to other users and earn interest from it. COMP is the native currency and governance token for the Compound protocol used to propose, discuss, and vote on all changes to the Compound protocol. It’s backed by reputable companies like Coinbase, Paradigm, and Dragonfly Capital.
Maker (MKR) is a platform built on the Ethereum blockchain. MKR is a cryptocurrency and a governance token that’s used to vote crucial decisions in the Maker community like ceilings, stability fees, etc on the network. Maker is the token that backed DAI, a stabilized currency that’s pegged to 1 USD.
DAI is very popular as a stable currency, despite its stability, over four hundred apps and services have integrated it which include DeFi platforms, games, and more. Maker allows you to create a stable currency using Maker Oasis.
Compound is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications.
Formerly, we could only trade our digital currency through centralized exchanges. These exchanges take our digital currency and save it into their server, which simply means they act as the intermediary.
Centralized exchanges set rules like KYC or limit to trading, and it’s susceptible to hacking. This gave rise to Decentralized trading or exchange platforms.
Kingswap is a newly built and promising decentralized digital exchange that has a distinctive feature ahead of successful Defi protocol–Uniswap.
KingSwap was initially a UniSwap fork (a copy of SushiSwap), but KingSwap has since become a hybrid platform (a mix of decentralized finance “DeFi” and centralized finance “CeFi”).
Uniswap is a decentralized exchange that allows users to trade directly on a peer-to-peer protocol securely without an intermediary. Uniswap also allows users to provide a liquidity pool of supported digital currency and earn interest from the transaction fees.
These are platforms that allow you to make payments and get paid easily at zero cost and without the risk of being scam or defraud.
Request Network is an application built on the Ethereum blockchain with a native token REQ that fuels the platform. Request Network enables individuals and companies to make payments or transact easily and provide invoices on the digital network. It serves as a decentralized network for payment requests.
These are apps built on the blockchain used to track blockchain address transactions.
As the name sounds, it’s an Ethereum block explorer and multipurpose analytics platform.
It’s proven that DeFi has a significant advantage over the centralized financial institutions, this is made possible by the blockchain. Please, note that DeFi is new and most of the apps are still in the beta phase so any slight bug could crash the platform.
Make your research before contributing to the DeFi ecosystem. I hope by reading this piece you now understand what is DeFi in cryptocurrency.