DeFi or Decentralized finance is a blockchain-based form of finance that does not rely on centralized financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains like the Ethereum and Binance Smart Chain.
The aim of decentralized finance is to use technology to remove intermediaries between parties in a financial transaction. All DeFi network uses stablecoins, use cases, and a software stack that enables the development of applications. DeFi makes it possible to offer several financial benefits to users in an uncontrolled and almost anonymous system.
Brief History of DeFi
The term DeFi, short for decentralized finance, is not invented by somebody, rather it was spurned out in a chat between blockchain (Ethereum) developers and entrepreneurs in an August 2018 Telegram chat. Participants included Inje Yeo of Set Protocol, Blake Henderson of 0x and Brendan Forster of Dharma. They were discussing what to call the movement of open financial applications being built on Ethereum. Other options considered were Open Horizon, Lattice Network and Open Financial Protocols. In the chat Henderson said DeFi worked well, as it “comes out as DEFY.”
Although historically, The MakerDAO lending protocol and its Dai stablecoin provided the first building blocks for a new, open, permissionless financial system from where other financial protocols launched, creating an increasingly vibrant and interconnected ecosystem. Compound Finance, released in September 2018, created a market for borrowers taking out collateralized loans, and lenders to rake in interest rates paid by those borrowers. Uniswap, launched in November 2018, allowed users to seamlessly and permissionlessly swap any token on Ethereum. Now, there is a hue number of DeFi applications, enabling use-cases like lending, borrowing, swap and trading.
DeFi Worth, 2021
“CoinGecko calculates a total market capitalization of $128 billion for decentralized finance (DeFi), the corner of the cryptocurrency industry that represents a wide range of lending, trading and betting activities carried out almost entirely on blockchain networks using tokens as proceeds and collateral. The top five tokens on CoinGecko’s list are UNI, LINK, LUNA, AAVE and CAKE.”Coinbase
How Anyone May Benefit From DeFi
One of the beautiful things about decentralized finance (DeFi) is the opportunities it provides for earning a passive income and managing payroll. Nowadays, many individuals and enterprises are now seeing the benefits of accessing alternative financial products and services made possible by the decentralized finance. That said, here are some benefits of decentralized finance listed out:
Staking is the process by which you lock (or “stake”) tokens into a smart contract and earn more of the same token in return. The token in question is usually the native asset of the blockchain, such as ETH in the case of Ethereum or BNB in the case of the Binance Smart Chain. What this simply means is that you “put” in your token for a period of time and within this period you earn some extra tokens. Infact nowadays, with today’s smart contract; all you need to do is hold on to your token in your wallet and you continue to earn extra tokens, and hence more profit.
There are DeFi Lending platforms that lend out assets and pay users an APY for locking their assets into a smart contract. These tokens are then utilized by borrowers, who pay interest, a portion of which is returned to the lender. Because the entire lending and borrowing process is governed by smart contracts, there is no risk of the borrower failing to repay their debt. Thus, a user should always be able to withdraw your staked assets at any time.
Since these lending services are built on public blockchains, they make use of cryptographic verification methods and thus reduce counterparty risk, make borrowing and lending cheaper, faster, and available to more people.
3. Liquidity Provider (LP)
Liquidity is simply tokens made available by their owners to be included in a pool. This pool powers the swap/exchange that other occur within the platform. For example, decentralized exchanges(DEXs) such as Uniswap and SushiSwap support swaps between token pairs, like ETH and USDT. This liquidity comes from pooled tokens belonging to liquidity providers (LPs), that is, ordinary DeFi users who place their tokens into the smart-contract controlling the pool in question. In doing so, you will earn a fee from all swaps, proportional to your pool share. The more trades that are conducted via that pool, the more you’ll earn.
4. Yield Farming
When you are a liquidity provider(LP) in a Decentralized Exchange(DEX), you will receive tokens denoting your pool share. These tokens can then be locked into yield farms, which are essentially DeFi protocols that reward you with more of the same token or with a different token. This means that while your pooled assets are earning a share of all fees in the DEX, your LP tokens can also be earned.
How To Connect To DeFi
There are a wide range of options when it comes down to interfacing with the decentralized finance. You may choose to connect through DeFi apps, or dapps, via decentralized Web3.0 gateways or simply through regular web interfaces.
Through staking, lending, liquidity provision and farming, DeFi provides a way to grow wealth for investors and small businesses while playing a part in increasing the liquidity and value of the entire DeFi ecosystem.