In this article, We will discuss DeFi applications, history, development, Top 5 DeFi crypto projects and pro & cons of DeFi.
DeFi or Decentralized Finance refers to the FinTech innovations that map financial services on to decentralized blockchain technology.
Blockchain platforms provide the architecture for drawing up smart contracts. This builds the first level level of trust to execute value based transactions. The conditions for the validation of the transaction are written in lines of code. The parties to a transaction agree on the open source code to begin business.
Mapping financial applications on these smart contracts is the primary aim of the DeFi movement. The applications of DeFi replicate financial models onto these decentralized networks. These include loans, savings, trading, insurance, payments etc.
Essentially, on a smart contract platform like Ethereum or Tron, an asset usually Ether (ETH) or any other cryptocurrency is pooled in which provides liquidity to carry out specific financial operations.
In some cases, the custody of assets is avoided, they only establish a decentralized link between parties to financial transactions.
Lending and borrowing forms the most important component of finance. In a DeFi loan model, the borrower and lender are bound by smart contracts which execute on the Blockchain itself. Hence, eliminating the need of intermediaries like a bank or other financial service companies.
For all intents and purposes, a smart contract built for finance can be termed as a DeFi. Various models adopt different techniques and market strategies. Nonetheless, they can be categorized on the basis on DeFi applications, as follows,
- Decentralized Exchange
Since these platforms can also be used to issue native tokens, a variety of DeFi models have flooded the market with their native crypto.
DeFi History – The Largest Crowdfunding and First Hard Fork
One of the first and most infamous DAO ever proposed was an initiative by Slock.it; the program was supported by the Ethereum Foundation as well. It was called ‘The DAO.’
The idea was to create a decentralized organization that runs on codes and votes. The money from the investors to the organization will be pooled in – the capital and used for carrying out business ventures.
‘Ethereum’ was chosen as the token to be used to build the pool of investment. However, due to a glitch in the code, a hacker was able to siphon more than 3.6 million Ether into a child chain. In April 2016, this accounted for more about 15% of all the ETH in circulation. Hence, it was too big to fail.
The price of Ether dropped from $20 to less than $10 in days of the revelation of the hack. The community eventually split on the issue which resulted in this first Hard Fork of the crypto-markets.
It gave rise to a second protocol – Ethereum Classic [ETC]. The supporters of Ethereum [ETH] reversed all the transactions related to DAO, while ETC supporters held that one must not meddle with transactions on the blockchain.
At the time it was the largest crowdfunding project ever; raising over 150 million in less than a month.
Moreover, the bigger one’s that came later are blockchain based cryptocurrencies only led by EOS and Filecoin. However, these are open-source decentralized platforms, not independent DeFi projects.
The blockchain platforms today support a plethora of applications, including transactions of stablecoin such as TUSD (Tether).
Apart from these, there are certain non-value transactions as well like games which run on the network. While the latter is still good for growth, it adds little value economically.
DeFi, on the other hand, works to support the financial system of the world. Hence, completely built on monetary value. Due to the global reach of the system, currently, only loans with collateral are approved by the projects.
The total value locked in Ether, Bitcoin, DAI and other cryptocurrencies is around $1 billion. It has more than doubled in less than a year.
Moreover, the lenders who seek to earn interest are the primary stakeholders of the particular DeFi. They act like initial SEED investors to the model.
Some of DeFi projects are listed below,
1. AAVE (LEND) – Lending and Borrowing
Aave is a loan based financial system which aims to provide decentralized transactions between a lender and borrower. Private institutions and entities can also benefit from the network by investing their money in the project, rather than banks, insurances and bonds.
There are certain prerequisites that the borrower must adhere to, to qualify for loans. Moreover, currently, most loans are collateral based. However, since the interests are earned in cryptocurrencies itself, there is always a risk of depreciation in price in case of failure of the network.
The AAVE Network also has a partnership with Chain Link [LINK] network which provides oracle services to the network. Hence, it can interact with other web and traditional digital transactions.
Founding Date: 1, May 2017
2. Kyber Network (KNC) – Decentralized Exchange
Kyber Network is a Decentralized Exchange platform for digital assets. The exchange fees provide for the returns of the investors and liquidity providers. The orders on a DEX are matched using a specialized algorithm.
Other popular DEX bringing reality to DeFi are Uniswap, Ox, Airswap, Bancor, Binance DEX and so on.
Kyber Network Launch Date: February 2018
3. Augur (REP) : Prediction Markets (Derivative)
Augur is a prediction market that runs on the blockchain. Basically, it allows users to bet on the outcome of an event. The odds of which are decided by an automated program according to the inclination of betters.
Beta Launch: March 2016, Mainnet Launch: July 2018
4. Ren (REN) – Inter-operable Payments
Ren aims to bridge different Blockchains by allowing to move value between across several protocols. Hence, the sender can pay with the choice of his cryptocurrency, lets say Ethereum [ETH], and the receiver could choose to get paid in Bitcoin [BTC].
The liquidity pool run on a decentralized network will enable automatic swap at the time of the execution of transactions.
5. Request Network (REQ) – Payments
Request Network is another payment based decentralized application built for an ERC-20 token – REQ. The vision is to develop a request payment module for invoices, B2B transactions, Taxes, and IoT.
Person A can broadcast an invoice on the network for payment from Person B. B then authenticates the payment based on the details to complete the transaction.
In relation to price, a few things common between most cryptocurrencies is the rise in December 2017, that lead to All-Time highs in January 2018.
Hence, most of these DeFi projects are onto completion their first bear cycle at the moment. It is necessary for these prices to move back to highs w.r.t. Bitcoin to gain Store of Value properties. This principle of degenerate and oscillators w.r.t. to altcoins was first proposed by on-chain analyst, Willy Woo.
Pros and Cons of DeFi
- DeFi reduces the cost of intermediaries by directly linking the lenders and donors, or buyers or sellers of an asset.
- Moreover, it also reduces the third party risks involved in case centralized institutions wish to exercise arbitrary control.
- The lines of code are solely responsible for carrying out the contracts. Since these lines of codes are open source and written on Blockchain, there is complete transparency about the history as well.
- The Decentralized projects are never completely decentralized. Moreover, in case of disputes such as glitches and hacks, the parties involved would hold the creators responsible.
- These are complex models that are designed to practically on their own.
- There is always a risk of bugs and exploits.
Last but not the least, while some believe that DeFi is the future of the Financial Services Industry, there is still a long way to go.
Nevertheless, there are immediate benefits of DeFi, like in DEX, could make investors immune from exchange hacks and scams.
Moreover, the freedom from the monetary control of centralized institutions is the ultimate vision of this movement. In the long run, the institutions and FinTech innovators must look to collaborate to efficiently build on traditional markets while leveraging the innovations in DeFi.
Related : Top 5 altcoins to buy in March
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