Feb 2023#Opinion

DeFi RevolutionLending and Trading Without Banks

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Oleg Kalugin

Senior Manager, Performance

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6 min

We're starting a series of educational articles where we'll talk about the world of decentralized finance. In this article, we'll break down the concept of DeFi, dive a bit into its history, and determine whether DeFi is different from the traditional banking system — and whether it can replace it.

The current system of loan issuance and other services offered by banks falls short of the demands for quick operations and accessibility of services. A 2017 with active DeFi ecosystem expansion – a replacement built on the foundation of blockchain technology.

What is Decentralized Finance (DeFi)?

The DeFi revolution offers a fresh perspective on the ease of conducting transactions, obtaining credit products, and trading. In a large-scale financial system known as decentralized finance, applications and services built using blockchain technology serve as efficient tools. Experts agree that such an ecosystem offers a substitute for the banking industry.

The DeFi Revolution Taking Over Traditional Finance

According to experts, in the near future, many people will have access to decentralized lending. Thus, traditional technologies characteristic of the current financial system can be replaced, like the manufactory, with the advent of the Industrial Revolution. 

Open-source protocols will be created, which will make it possible to introduce new investment platforms. The latter will be able to receive passive income from cryptocurrency assets.

It is important to understand that DeFi is not a separate financial instrument but a system of services and applications formed based on smart contracts of various blockchains. The most popular of the latter is Ethereum.

History of Decentralized Finance

By the end of 2017, when the demand for an open financial system appropriate for the Internet era had become sufficiently developed, the DeFi concept was introduced. The prospect of introducing a fundamental technology that ensures the operation of digital currencies was well received by developers and investors. The users could now manage their resources and cash flows.

Difference Between DeFi Applications & Traditional Banking

The primary distinction between traditional banking services and decentralized finance is the availability of the full spectrum of financial services without the need for registration or bank assistance. Every Internet user has access to borrowing, lending, transactions, and even trading within the DeFi framework. P2P (peer-to-peer) services and decentralized applications(dApps) are used for interaction with the ecosystem.

Important! There are no centralized structures in the DeFi-system. This means that DeFi is also almost unregulated by the government.

The smart contract specifies every requirement for carrying out business operations.

The application begins operating automatically after the smart contract is activated.

Learn more about how blockchain technology can help improve your business infrastructure here

Benefits of DeFi

Decentralized finance is open source, which ensures openness to audit. Each user can determine the functionality of the contract and find bugs. At the same time, we are talking about the publicity or pseudo-anonymity of transactions

The advantages of the ecosystem include:

  1. Accessibility 
    DeFi applications can be used by any internet user. Quick access to financial transactions.
  2. Inclusivity  
    The inclusive nature of DeFi allows each user to create an application and use it. At the same time, there is no need to support dispatchers and fill out special account forms. 
  3. Variability 
    If necessary, you can change the parameters. For example, it is possible to choose a different interface. 
    Experts note that such transaction qualities as transparency and high speed are inherent in the new system. There are no intermediaries, which speeds up, for example, the lending process. 
  4. Transparency of operations 
    Management using smart contracts provides clear rules for participation in the system.  
    The use of open-source protocols provides an environment of trust. At the same time, everyone can check the reliability and security of the ecosystem.

Examples of DeFi

DeFi's applications include decentralized hedge funds and crowdfunding platforms, and more. Here are some examples:

  • Uniswap ($UNI)

The Ethereum-based decentralized cryptocurrency exchange (DEX) launched in 2018. The absence of commission is almost entirely absent in Uniswap. The funds are fully under the control of the users. Tokens can be traded using this smart contract exchange.

  • Compound ($COMP)

A lending platform using the Ethereum blockchain network for its smart contracts. This market is distinguished by open-source software and has Quick access to financial transactions. The following cryptocurrency tokens are available for users to deposit or trade with: USDC, ETH, and DAI. 

dApp

Decentralized applications (DApp) do not require a centralized database to work. They work on the Ethereum blockchain technology and other blockchains for which smart contracts are available, for example, EOS and TRON. It is predicted that the dApps market volume will reach more than $368 billions in 2027.  

5 Useful dApps for crypto users & investors:

1. MakerDAO 
MakerDAO is a credit platform. Available to users all over the world. There is no credit history check. ETH is used as collateral.

2. Uniswap 
Uniswap is a decentralized exchange (DEX). Allows participating in transactions of ERC-20 tokens. Management of a centralized authority is not required. 

3. DeFi Llama. 
Llama is a powerful blockchain-based analytical platform with different tools. Using a dashboard on the official website, users can search & analyze prospective projects for investments or find the most profitable tokens for staking. 

4. Curve 
Curve is a DEX that uses automated liquidity pools. It is used to exchange stablecoins and ERC 20 tokens. Low commission. Quick access to financial transactions.

5. DYdX 
DYdX is based on the Ethereum blockchain. Allows you to lend, borrow, and trade cryptocurrency. Margin trading is available.

These tools can help you make wise investment decisions. If you want to make your own DeFi business successful, you should learn how to increase the market capitalization of a DeFi project. 

Decentralized Exchanges

A peer-to-peer (P2P) trading platform called the decentralized exchange (DEX) allows cryptocurrency transactions to be carried out without the involvement of middlemen. Smart contracts form the foundation of how it operates. Here are some of the DEXes:

  • Kine protocol;
  • PankakeSwap;
  • Balancer; 
  • Sushiswap;
  • OpenOcean.  

In conclusion, DEX is the best option for cryptocurrency traders and investors who desire more autonomy and anonymity while managing their digital currency holdings.

Next Steps: Eye of Regulators

The powerful potential of DeFi arouses the interest of financiers of the traditional system, as well as politicians. Experts believe that decentralized finance is now going through a critical period. Regulators are closely monitoring their development. But at the same time, there is the arrival of new investors who bring capital. This creates conditions for the further development of DeFi.

Added Trust and Protection, Allowing DeFi to Grow

DeFi Revolution is characterized by a good potential, which makes it possible to consider this financial offer promising. But there are also a number of concerns about the project. Regulatory authorities require a safety guarantee. Blockchain technologies provide reliable protection against hacking, but this does not negate the vulnerability of DeFi applications. This risk is especially relevant when reusing the code. 

Conclusion

DeFi is a modern crypto infrastructure. Blockchain technology makes it possible to conduct financial transactions at high speed without intermediaries. Currently, this is the most convenient and effective option for lending and trading. Web operations based on the bitcoin blockchain and other cryptocurrencies are a modern trading option. 

Although decentralized finance has not yet replaced the traditional banking system, it has helped us understand that the financial system can exist not only under the control of governments. Now DeFi is one of the most promising areas of cryptocurrency development. Understanding the technology and how it works can help with business development. One example is running a fundraising campaign.

With the advent of DeFi, IDO has become one of the most popular ways of fundraising. Check out how to run a successful IDO.

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