DeFi: 1 comprehensive guide to Decentralized Finance (DeFi)

In general, decentralized financing (Defi), which drives the blockchain, is still in its infancy but offers an attractive proposal through which individuals and institutions use broader access to financial applications without the need for a financial intermediary confidence. This development could benefit people who did not previously have access to these financial services. Also, Defi promises a comprehensive capital market.

What is Defi?

Defi emphasizes a broader approach to general decentralization in the traditional financial sector. The heart of the initiative is the opening of traditional financial services to all, providing an ecosystem of unlicensed financial services based on blockchain infrastructure.

Overall, Defi is an ambitious attempt to decentralize fundamental cases of traditional financial use, such as blockchain trading, lending, investing, wealth management, payments, and insurance. Defi is based on decentralized applications or protocols (dApps). By running these dApps on the blockchain, you ensure a financial network of peer accounts. Like Lego building blocks, each dApp can be combined. Smart contracts function as comparable connectors with well-defined APIs in traditional systems.

The rise of Defi

Although the open-source funding initiative is largely independent of blockchain, it operates on more flexible blockchains (i.e., programmable smart contracts) as well as on a strong developer base. More and more crypto-institutions provide Blockchain solutions for Defi. We name the 5 most popular protocols used for smart contracts.

ProtocolVolume 1-1-21
Ethereum2,5 billion
Binance Smart Chain141.53 million
Waves37.61 million
Eos8.4 million
Tron8.03 million
most popular smart contract platforms 2021

As you can see, these are all blockchains with a crypto currency attached to it. Therefore these cryptocurrencies: Ethereum (ETH), BinanceCoin (BNB), Waves (Waves), Eos (EOS) and Tron (TRX) are popular among many investors. The combined volume of Defi of these smart contracts as per 1-1-21 was $ 2.04 billion. Furthermore smart contracts were used for Exchanges ($ 854.49 million) and gambling ($ 10.6 million).

Now we know the basis of Defi it’s time to dive a little deeper into the Defi ecosystem.

The Defi ecosystem

Defi ecosystem and its products the various products included in Defi are also known as open-source financing, as it is an ecosystem in which blockchains, digital assets, and open protocols are integrated into conventional financial structures. Let’s take a look at some of these products.

1.Open loan protocols:

As the name suggests, it is a blockchain platform for digital money borrowing, open lending protocols is the most popular among other open finance sectors in recent years. Like a bank, users deposit their money and when someone lends them digital assets, they earn interest. But instead of intermediaries, smart contracts here dictate loan terms, connect creditors and borrowers, and distribute interest rates. Due to the innate transparency of the blockchain and the absence of intermediaries, the lender makes higher profits and more clearly understands the risks.

Open lending protocol is based on a public blockchain like Ethereum (ETH), and due to the importance of its ability to lend digital assets, it can be widely adopted globally. It offers several advantages over traditional credit services.

• Integration with loans or borrowings with digital assets.

• Digital asset guarantee in case of loan default.

• Current settlement of transactions and new ways of securing the loan.

• Standardization and interoperability, which can also reduce costs by automation.

• There is no credit check, which means better access for people who cannot access traditional services.

2. MakerDAO:

This has become one of the most popular decentralized lending protocols. It can be seen that the company has proposed several stability rate increases to maintain parity with the Dai-USD price parity, due to scale problems. The latter allows users to borrow and lend digital assets but uses well-known credit models such as credit checks and a company that handles back loan applications.

3. Stable coins:

Unlike other cryptocurrencies that have variable values, stablecoins are tokens issued by a blockchain designed to hold a certain value. This is usually associated with fiat currencies like the US dollar, but often with other assets like gold. A stable currency includes collateral to adjust to price changes.

However, the association makes stable coins centralized, which causes a so-called ‘single point of failure‘. These stable coins require confidence in a centralized entity and are therefore subject to capital losses and destabilization by external geopolitical factors. It also becomes risky when there is a lack of confidence in the central party’s ability to protect bills of exchange.

This problem is solved by making these coins stable and verifiable. Keep in mind that the companies behind these stable coins earn interest on the cash deposited by users who deposit into a bank account. Research shows that over time, this price margin would decrease and benefit the customer more. If you want to learn more about stable coins, please visit our dedicated stable coin page (to come).

These are the 10 most popular Defi tokens

While investing or trading in crypto is considered as to be in an ‘early stage’, investing in Defi tokens is even more infant. On one hand this means that there are very interesting returns on investment to be earned. On the other hand this means that the market is even more volatile and unregulated than the crypto market. However, investing in Defi tokens becomes more and more popular. Below you’ll find the largest Defi tokens, sorted by market capitalisation.

Name Price24H %Chart (7D)
uniswap
Uniswap (UNI)
$36.82-9.69%
wrapped-bitcoin
Wrapped Bitcoin (WBTC)
$55,655.00-5.55%
terra-luna
Terra (LUNA)
$15.94-8.71%
aave
Aave (AAVE)
$437.27-8.67%
dai
Dai (DAI)
$1.0000.330%
maker
Maker (MKR)
$4,963.76-8.24%
compound-governance-token
Compound (COMP)
$809.570.930%
thorchain
THORChain (RUNE)
$16.94-7.24%
havven
Synthetix Network Token (SNX)
$16.46-9.50%
yearn-finance
yearn.finance (YFI)
$66,567.0018.20%
sushi
Sushi (SUSHI)
$14.11-14.23%
uma
UMA (UMA)
$26.793.85%
loopring
Loopring (LRC)
$0.514-11.21%
renbtc
renBTC (RENBTC)
$55,428.00-5.82%

Defi benefits

Defi is based on blockchain. A blockchain is often referred to as a general layer infrastructure, so on Defi, it can be considered a group of second layer applications. This allows Defi to be inherent in the fundamental characteristics of decentralization. It is important to note that this is only true if the blockchain itself is decentralized. By fulfilling this prerequisite, the main advantages of opening a financial asset are shared with the main advantages of the blockchain:

• True decentralization enables census resistance, global participation regardless of social status, and frees reliable third parties.

• The use of blockchain as a technological infrastructure enables relatively fast and cheap transactions/agreements, the immutability of financial contracts, and contract automation.

• Defi programs typically allow the user to retain possession of private keys. This is known as the custodian in the blockchain ecosystem. The user has complete control of the money without a reliable third party.

• Greater transparency of the ecosystem, and thus price and market efficiency. There is no minimum risk for the client, such as asymmetric data, and personal interests are managed by a transparent protocol.

• Defi promotes network effects, as a multitude of innovations are generated by a unique combination of different projects in Layer 2 or even Layer 3 applications.

Conclusion:

Defi or decentralized financing wants to disrupt the current financial system by bringing new solutions to the public blockchain. Defi reorganizes existing traditional financial systems defined by centralization and allows people to communicate directly in decentralized, secure, and transparent protocols. The very nature of the movement eliminates the issue of trust in human hands and uses the code it executes to create complete security.

Disclaimer

Please note that our site does not provide any financial advice. The statistics and information shown are solely provided as possible source for your own research on (investing in) crypto and/or for educational/entertainment purposes. Despite our efforts to present information in a right and timely manner we will not accept any responsibility for any shortcomings in the data and/or information provided. Furthermore please that this site uses affiliate links. This means we might earn a contribution in the costs of operating this site and providing free information if you decide to click on (one of) the links issued.

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