Decentralized finance, or “DeFi” in short, has taken over the world of cryptography and the blockchain. However, its recent resurgence masks its roots in the bubble era of 2017. Although everyone and their dog made an “Initial Coin Offer” or ICO, few companies saw the potential of the blockchain very much. beyond a quick price gain. These pioneers imagined a world where financial applications, from trade, savings, banking, and insurance, would be possible simply in the blockchain without intermediaries.
To understand the potential of this revolution, imagine if you had access to a savings account that generates 10% a year in US dollars but without a bank and virtually no fund risk. Imagine being able to exchange crop insurance with a Ghanaian farmer sitting in your Tokyo office. Imagine being able to be a market seller and earn fees as a percentage that would please the entire Citadel. Sounds too good to be true? It is not. This future is already here.
DeFi building blocks
Here are some basic DeFi blocks you need to know before moving on:
Elaboration of automated markets or the exchange of one asset for another without trust without an intermediary or clearing house.
Excessively 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 created
Stablecoins are often used in DeFi because they mimic traditional fiat currencies like the USD. This is an important development, as the history of cryptography shows the volatility of things. Stablecoins like DAI are designed to track the value of the US dollar with small deviations even during strong bearish markets, i.e. even if the price of cryptocurrency is falling as the 2018- bearish market 2020.
Loan protocols are an interesting development usually built on top of stablecoins. Imagine if you could close your $ 1 million assets and then borrow them in a stable currency. The protocol will automatically sell your assets if you do not repay the loan when your collateral is no longer sufficient.
Automated market makers form the basis of the entire DeFi ecosystem. Without this, you will be stuck with the legacy financial system, in which you need to trust your intermediary, your clearing house, or an exchange. Automated market makers or AMMs, in short, allow you to exchange one asset for another based on a reserve of both assets in your groupings. Price discovery occurs through external arbitrage. Liquidity is grouped according to other people’s assets and they have access to trading commissions.
You can now expose yourself to a wide variety of Ethereum ecosystem assets and never have to interact with the traditional financial world. You can make money by lending assets or creating markets.
For developing countries, this is an amazing innovation because they now have access to the full set of financial systems in the developed world without barriers to entry.