Table of Contents
DeFi Explained 6
The Rise of DeFi 9
DeFi’s Top Applications 11
The True Power of DeFi 14
The Downsides to DeFi 19
The Future of DeFi 23
Final Words 30
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DeFi’s origin is often traced back to 2015, when a platform called MakerDAO allowed people to utilize cryptocurrency for collateral on their loans.
DeFi, like the traditional cryptocurrencies, promises to do away with the unnecessary intermediaries like banks and stockbrokers. This viewpoint Is fueling the market lately.
Bitcoin was created in 2009 as an alternative to traditional finance (and financial authorities like banks and stockbrokers), but many limitations still exist.
hile Bitcoin was meant to function like money, its functionality depends on a network of new central authorities that are acting much like the institutions they were meant to replace.
Miners, node operators, wallets, and exchanges—these authorities are showing a distinct proclivity for acting just like banks and stockbrokers.
In other words, Bitcoin doesn’t seem to be truly decentralized.
A true decentralized system should be run by the people alone. Bitcoin has given us glimpses of this but has ultimately fallen short of its goal.
With DeFi, there are no central authorities and protocol are run by smart contracts designed to eliminate foul play.
The open financial network is trustless and decentralized, facts that have attracted many investors.
DeFi’s Top Applications
Now that we’ve explained what DeFi is and what caused its rise in popularity, let’s look at some of the more notable applications for this protocol.
Decentralized Exchanges (DEXs): these are exchanges that operate without an intermediary.
With a DEX, users can connect directly with one another to buy and sell cryptocurrencies.
Any assets traded under a DEX are not held in escrow or in a third party wallet the way a centralized exchange would do. Some top DEXs include Uniswap, SushiSwap, and Curve.
These exchanges are not as popular as centralized exchanges, which are operated by a central authority.
Coinbase and Binance are examples of centralized exchanges and are custodial in nature because the buyers and sellers trust the central authority to keep their assets safe.
Lending Platforms: these use smart contracts in place of third parties like banks or stockbrokers. This allows lenders and borrowers to participate in an open system.
Proponents of DeFi claim that these platforms are democratizing the entire financial landscape.
In decentralized lending platforms, lenders can earn interest on cryptocurrency assets by loaning them out, while borrowers can assess liquidity without actually selling off those assets.
With our traditional financial situation, you must offer collateral before you can get a loan from the bank. DeFi is similar, but borrowers have to offer assets which add up to more than the total loan in order to obtain that loan.
Some of the top DeFi lending platforms include Aave, Maker, and Compound.
Prediction Markets: these allow you to bet on the outcome of a future event, such as a presidential election.
In fact, they flourished during the 2020 elections, with Augur recording a milestone volume of over $8 million.
Prediction market platforms act like traditional prediction markets, but with blockchain functionality, which means no intermediaries. Some examples include Gnosis, Augur, and FTX.
Yield Farming: this is the hottest new term in DeFi. It’s the process of locking up cryptocurrencies in exchange for some sort of reward.
Yield farmers stake popular coins like ether, tether, dai, etc. Aave and Compound are two of the major platforms to farm DeFi yields.
The True Power of DeFi
Traditional banks are bureaucratic. They’re expensive to run, too. They take too long to process transactions—sometimes days—and have excluded many people from the financial system due to their stringent requirements.
Here are some of the benefits of decentralized finance.
It is permissionless.
DeFi opens the financial system to everyone regardless of race, income, culture, or geographic location.
All anyone needs is a connection to the internet via a smartphone or computer.
In 2018, the World Bank estimated that some 20% of the world’s population has no access to banking services. Mostly, this is because they lack required government-issued identification cards.Other Details
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