If you follow the trend of blockchain from the invention of Bitcoin. The blockchain technology came into the picture as a currency use case.
But later on, many projects come out to solve the market's existing problems. If you see 2016-17 many POC (proof of concept) projects are pursued more significant investment Through ICO (initial coin offering) for real business solutions.
True blockchain adoption has not occurred with 2017 rally. But in 2020 the beginning of the new decade POC projects are evolving to the real-world application.
I think this is the beginning of " Decade of Blockchain". In 2020 we will see global recognition of crypto assets in the Financial Sector.
One use case of blockchain in the financial sector which comes into the limelight from the recent few months which is Decentralized Finance (DeFi).
DeFi is the one who leads the next crypto ride. Decentralized finance is the road to developing a trustless and transparent financial ecosystem run without intermediaries.
So if you don't want to miss this train and catch the high growth potential opportunity of DeFi then be with me in this article. We will go on some fundamentals of DeFi which you must know.
Why DeFi?
DeFi is the abbreviation of decentralized finance. Cryptocurrencies have made the promise to make the payments worldwide to anyone without any intermediaries.
DeFi takes this promise one step forward. DeFi is also referred to as blockchain-based open finance for everyone.
The traditional centralized system of finance is not so user-centric. Central financial institutions keep power in their hands only and drive our economy.
They issue currency and we use this currency for every trade as a medium of exchange. But we don't know how much currency is issued and also we don't control the issuance of currency.
So ultimately all the control of our assets is in the hands of these authorities. Such a huge power belongs to central authorities put the risk factor in the center.
Basically, these bodies are run by human's chances of making errors or taking a wrong decision is also high.
When it comes to investing in that case you have to put your trust in financial instruments like a bank, share markets, mutual funds as well as financial advisors advise you where you should put your hard earn money.
In exchange, they take cut from your return profit. In such a scenario, financial instruments are also controlled by central authorities, and the possibilities for taking wrong decisions for your investment are very much high.
Let's take an example in united states if you put your money into the bank you can get 0.04 to 0.09% of annual interest.
But on the other, hand if you borrow money from the bank first you will ask for formalities and collateral and It will time consuming process. Finally, you will get a loan by 4 to 6.5% of the annual interest.
So by the above example intermediaries like banks and other custodial services are very unfamiliar with the customer.
They actually use your money to lend others and earn huge by charging interest on your money and in return, you will get nothing. Basically you not even beat Inflation by putting your money into the bank.
This needs to be reform. Legacy of financial instruments should be break. and finally, decision-making power should go into the user's hand. By removing intermediaries' only end-user should be benefited.
We should decentralize this central finance infrastructure. This can be done only with decentralized finance.
What is DeFi?
DeFi is basically taking traditional financial products binding them in smart contracts to make them open, permissionless with the help of blockchain.
Defi is an overlapping network of dapps and smart contracts providing financial services like lending, borrowing, trading, derivatives, exchanges, etc.
Ethereum blockchain is mostly used to develop Defi applications.
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Benefits of DeFi
Defi is built on blockchain technology. Blockchain itself promote as a tamper-proof, permissionless, borderless, censorship-resistant.
So Defi built on blockchain fulfills all the properties of blockchain for serving open finance to everyone.
Anyone from the world can participate in Defi without having any country barrier, or without any limit, with any religion.
Open to everyone:-
Permissionless finance is just a dream before Blockchain comes. Defi enables people who don't have access to financial services to participate in the global financial movement.
According to the world bank data near about 1.8 billion people have no banking access or very limited banking access.
They do not have full function banking benefits like lending, borrowing, and many financial services that we are getting benefited.
Although in the traditional banking system government-issued identity document and credit scores are necessary to open a bank account and take loans.
On the other hand in Defi projects like maker DAO or AAVE allows anyone to take out a loan against some Ethereum(ETH) as collateral.
eg. You have to deposit some ETH to maker DAO smart contract. Choose your collateralization ratio of your loan and your risk appetite. Once you are done with the process you will be given some DAI tokens. 1DAI = 1USD.
Transparent and Secure:-
Defi built with a backbone of Blockchain. And blockchain itself is a distributed ledger system. Everyone can see what's happening on the blockchain network see transaction details or past records on the blockchain.
Basically, blockchain is driven by community consensus protocols. So no hidden rules or charges behind the walls. All rules enforce the same protocols for every network participant.
On the other hand, if you want to get a loan from the traditional financial system. You have to go to the bank to comply with their requirements and compare different schemes with interest rates.
But you have to make sure that they aren't hiding any charges or penalties in the box.
As the security perspective Blockchain is backed by the cryptographic hash function which is tamperproof evident. It is nearly impossible to change or alter data on the blockchain.
And no single party can take the decision in decentralized finance, decisions generally made by huge community debate. And Decisions are very much known to everyone.
Whereas the traditional financial system mostly run by the central authority or political power peoples. Decisions can be modified for the state own purpose or personal benefit reasons.
If you put your money in the bank or other financial instruments possibilities are very much high of collapsing of bank or taking wrong decisions by authorities.
Wall Street bank Lehman Brothers which has more than 150 years of legacy in the finance sector is collapse during the 2008 financial crisis. It is the largest bankruptcy in US history.
Easily Programmable:-
Anyone can access their platforms. They can code and build their own next-generation Defi project.
Defi is not only decentralized for users but it open for creators also. This can truly mean decentralization in the system with users.
Defi emerged in various sectors:-
Decentralized exchanges DEX➤
A decentralized exchange is a cryptocurrency exchange or liquidity pool that operates in a decentralized way.
Lending and Borrowing platforms➤
Defi provides you instant lending and borrowing services. You can get flash loans, lend your fund to others, and earn interest.
Decentralized Autonomous Organizations DAO➤
Traditional organization structure is basically run by experts and management body, But DAO is a decentralized organization which runs by the community. No one can singly own the organization.
for eg. Aragon
Decentralized prediction markets➤
Prediction markets for betting sports, prediction of weather, world event, economy, and many predictions done by decentralized way for more transparency and accuracy. Decentralization of prediction markets.
for eg. Augur
Open Market Places➤
Decentralized open market places to buy and sell goods and services without having middleman.
for eg. OpenBazaar, OpenSea
Issuance Platform➤
Issuance of digital assets, manage digital assets, and create digital assets on the blockchain.
for eg. Polymath
Decentralized Escrow➤
Decentralized escrow services allow a secure way to trade cryptocurrency P2P manner or centralized cryptocurrency exchanges without losing your fund control.
Decentralized Asset Management➤
A decentralized asset management platform allows anyone to manage, setup investment, or wealth of digital assets on the blockchain in a decentralized, secure way. Decentralized investment infrastructure.
for eg. Melon
Monetization of our own funds:-
Fundamental rights of every human-like freedom to speech, freedom to education, freedom to use the constitution, and many more.
But no country or any financial institution in the world gives you the freedom to monetize your own funds. You have no idea that the hard-earned money you put in the bank account where it will go.
How it can be utilized, how you should be benefited. You have to put blind trust in financial institutions or states. You have no control over your funds.
Decentralized finance gives you the power of the monetization of your own funds. Without your consent, no one can decide where your money should go and how it can be utilized.
Financial speculation of DeFi
Defi is a torrent of finance. Not just in Blockchain but in the finance sector also, Defi could be the next big thing.
People keep trying to build more sustainable products in Defi and more innovation is yet to come. We are going to see more financial use cases being built on Defi that provide real benefits to end-user.
Why more investment still yet to come in Defi
Cryptocurrency holders are looking more closely at to Defi space. They offer to earn handsome Interest on their crypto holdings. Along with crypto holding now, they can earn interest on it.
for eg., AAVE is the pretty hot project in the Defi. You can earn near about 6% annual interest by putting your crypto into this protocol.
A normal non-crypto user who has minimal knowledge about this space also wants to grab this opportunity. And with the very simple and minimalistic design of Defi platforms it very easy for them also to start with Defi protocols.
Institutional investors had a conservative approach to cryptocurrencies. Because of a lack of regulations around the world and volatility in cryptocurrencies. But now governments also start to put some positive steps toward this industry.
Now they also know that blockchain space moving towards maturity and provide real-life practical solutions to the industry. So they also see an opportunity to make a profit from this industry.
Like earn Interest from crypto holdings, raise capital with Defi, Yield farming in Defi, etc.
DeFi providing you golden opportunity to earn money on your money...!
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| Source:- https://messari.io/ |
How big is DeFi space right now...!
Cryptocurrency itself is a very small space as compared to global GDP. Whereas Defi has just a single digit presence in the whole crypto industry.
As of writing, if you compare the whole Defi ecosystem to the global cryptocurrency market is just 1.5% of the total crypto market.
So here is the opportunity for all of us to catch an early mover advantage in this super interesting Defi world.
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