Decentralized finance (DeFi) is a term that is becoming very popular in the crypto world during this year 2020 due to the need for decentralized banking and financial products and services given the evident inefficiency of the financial industry to satisfy the real needs of the users.Source: medium.com
What is DeFi? It refers to a set of platforms that use blockchain technologies to provide truly decentralized financial services (not linked to central banks and other public financial institutions) and with easier access for people with very different profiles. It is an alternative to traditional financial services but in a decentralized way and that operates on the basis of smart contracts run normally on the etherium blockchain.
In this context of decentralized finance, which is developing at a very fast pace, terms such as "Yield Farming" appear, refering to platforms where funds are "planted" to collect or "harvest" returns derived from investment and loan operations in P2P format using blockchain technology, usually on Etherium-based smart contracts.
In platforms like these it is not even necessary to know the name of the lender or borrower, it is only important to automate the operation so that the system manages the opening, payments of instalments and the closing of the loan contract in a self-executing way with the so-called "Smart Contracts".
DeFi platforms are very interesting and rising sub-market within the crypto market as well as the Bitcoin market, so both values have reached record figures last July.
The table below shows the evolution of capitalized funds and contracts closed in the DeFi market in the last 90 days with a great upward trend, exceeding 3.6 billion dollars at the end of July.Fuente: DeFi Pulse
As it can be seen in the box above, in this decentralized finance market there is a ranking of platforms that are developing and are beginning to have a relevance in this sector. Below we will name the most outstanding ones. Thus we have the following three top positions:
Source: Mind Capital
- MakerDAO: It is a protocol that offers the possibility of depositing the stablecoin DAI and other cryptocurrencies using an investment account through the Oasis Save system in which interest is received on the deposits. It is like a interest-bearing account of decentralized finance. No minimum amounts or complicated bureaucratic procedures are required, just connect the wallet and start receiving returns.
- COMPOUND: is responsible for the fact that the DeFi system has become so well known. It is a very complete platform to offer the management of decentralized financial services allowing the generation of interest on loans of different tokens included in stablecoins. In addition, the system allows users to participate in the improvements of the Compound system as long as they are holders of the native COMPOUND token.
- SYNTHETIX: Is the third more important DeFi platform that tracks the value of real-world assets such as gold, BTC, USD, i.e. commodities, fiat currencies and cryptocurrencies. Its native token, the Synths or SNX is based on consolidated digital assets and is managed and stored based on etherium ERC20 tokens. It is interchangeable in exchanges starting with their own exchange within the Synthetix ecosystem. In the future it will add references such as S&P 500, AAPL (Apple) and Tesla within its platforms.
DeFi or Decentralized Finance refers, therefore, to financial services such as loans, exchanges, investments, stablecoins and more, which are built and executed in the blockchain via smart public contracts, usually etherium-based.
Thus, the most significant contributions and characteristics of these decentralized finance platforms may be as follows:
- The main benefit is that financial services become open source, decentralized and resistant to censorship without neglecting security, data protection and integrity, with greater transparency and accessibility.
- Many protocols within DeFi have achieved a high level of decentralisation although it is very difficult to achieve 100% as many protocols are still centralised by development teams and foundations.
- The most popular use of DeFi platforms is for lending funds, mainly using crypto currencies, allowing users to get interests on their deposits in crypto wallets.
- Although there is some risk that hackers may exploit the vulnerabilities of smart contracts to steal funds, the DeFi platforms are increasingly using security practices which are becoming more and more easily implemented as this market is maturing.
DeFi is compound of Smart Money “pieces”Source: medium.com
By putting together existing components within DeFi, you can combine, modify and even create powerful financial tools from those "pieces". For example, Compound is a crypto-monetary marketplace where etherium-based lending services are conducted. When DAIs are supplied to the Compound system, a new part of the block is created by becoming cDAIs tokens within the platform, tokens that are representative of DAIs but can be transferred (sent/received) within the Compound ecosystem to other contracts for other purposes, so that the parts are assembled to create new tools and constructions.
Essentially, DeFi addresses the challenges of traditional financial markets and Fintech solutions. Unlike the latter, decentralized finance eliminates the reliance on centralized systems or intermediaries and central authorities for money and loan services by facilitating the movement of crypto funds using a distributed ledger technology called blockchain. With the adoption of this ever-evolving disruptive technology, the DeFi concept is gaining considerable relevance in the crypto world that is even now jumping to the realm of traditional finance.