Descentralized Finance, or “DeFi” for short, has taken over the world of cryptography and the blockchain. However, its recent resurgence masks its roots in the bubble era of 2017. While everyone and their dog made an “initial coin offering” or ICO, few companies saw the potential of the blockchain much more. beyond a quick price gain. These pioneers imagined a world where financial applications, from trade to savings, to banking and insurance, would be possible simply in the blockchain without any intermediary.
To understand the potential of this revolution, imagine if you had access to a savings account that yields 10% annually in USD but no bank and virtually no fund risk. Imagine being able to negotiate crop insurance with a Ghanaian farmer sitting in your office in Tokyo. Imagine being able to be a market maker and earn commissions as a percentage that any Citadel would want. Sounds too good to be true? It is not. This future is already here.
DeFi construction elements
Here are some basic DeFi blocks you should know before moving on:
Automated market creation or exchange of one asset for another without trust without an intermediary or clearing house.
Over-collateralized loans or being able to “use your assets” for traders, speculators and long-term holders.
Stablecoins or algorithmic assets that track the price of an underlying without being centralized or supported by physical assets.
Understand how DeFi is made
Stable currencies are often used in DeFi because they mimic traditional fiat currencies like the USD. This is an important development because the history of cryptography shows how volatile things are. Stable currencies like DAI are designed to track the value of the USD with minor deviations, even during strong bearish markets, that is, even if the price of cryptocurrency crashes like the 2018 bearish market. 2020.
Loan protocols are an interesting development that is usually built from stable currencies. Imagine if you could lock in your $ 1 million worth of assets and then borrow them in stable currencies. The protocol will automatically sell your assets if you do not repay the loan when your collateral is no longer sufficient.
Automated market makers are the foundation of the entire DeFi ecosystem. Without this, you will be stuck with the legacy financial system where you have to trust your broker, clearing houses or an exchange. Automated market makers or AMMs, for short, allow you to exchange one asset for another based on a reserve of both assets in your groups. Price discovery is done through external arbitrage. Liquidity is grouped according to other people’s assets and they have access to trading commissions.
You can now get exposure to a wide variety of assets in the Ethereum ecosystem and without ever having to interact with the traditional financial world. You can make money by lending assets or becoming a market maker.
For the developing world, this is an amazing innovation because they now have access to the complete suite of financial systems in the developed world without barriers to entry.