Six main components of the Defi ecosystem. 해시게임 What is Decentralized Finance (Defi)?
Defi is a blockchain-based form of finance.
Instead of relying on a central financial institution,
it utilizes smart contracts, a self-executing computer program built on a blockchain,
to execute transactions.
Defi aims to create a new financial ecosystem that is accessible to everyone and does not require trusting third parties.
Instead, users trust that the technology will perform the provided service as proposed.
In this article, we will cover the six main components of Defi,
namely lending, stablecoins, decentralized exchanges, derivatives,
margin trading, and insurance.
1. Borrowing
With Defi loans, investors deposit fiat currency and earn interest through a decentralized application.
Individuals or businesses can borrow money online,
and the interest and borrowing will be repaid by a predetermined date.
These transactions utilize smart contracts to execute loans,
which means no middlemen and no additional fees associated with loans.
This also eliminates lengthy paperwork processing times,
making loans through Defi much faster than traditional financial institutions.
Furthermore, this process provides additional benefits as peer-to-peer lending enables users to obtain loans at lower interest rates than banks,
and long-term investors are able to earn interest on the loans.
The compound is currently the largest Defi lending app,
with more than $500 million in assets locked in the protocol.
It enables users to contribute assets such as Ether, BAT, 0x,
and Tether and start earning interest.
These assets can also serve as collateral for borrowing other assets.
A stablecoin is a cryptocurrency whose value is pegged to another asset,
such as a fiat currency, an exchange-traded commodity,
or another cryptocurrency.
While cryptocurrencies such as Bitcoin and Ethereum are highly volatile,
stablecoins offer a more stable alternative designed to deal with price volatility.
Stablecoins can be used for a variety of purposes,
including trading goods and services,
enabling faster and cheaper international transactions,
decentralized insurance solutions,
derivatives contracts, and making and taking out loans.
Additionally, when a country’s economy is in recession and its dollar value depreciates,
many people turn to stablecoins,
exchanging their fiat currency for coins pegged to another country’s currency to protect their wealth and safety.
There are two main types of stablecoins;
algorithmic stablecoins and non-algorithmic stablecoins.
DAI is an example of an algorithmic stablecoin.
These stable tokens utilize smart contracts to respond accordingly to market events using predetermined actions programmed into the contracts.
Tether is an example of a non-algorithmic stablecoin.
Many will argue that non-algorithmic stablecoins defeat the purpose of decentralizing money because they have companies behind them that are responsible for holding the stablecoin’s value in the form of fiat currency or other assets.
Nonetheless, these coins are often used in Defi applications.
Decentralized exchanges are cryptocurrency exchanges that connect buyers and sellers and allow users to transact over peer-to-peer networks.
They allow you to exchange different cryptocurrencies,
however, you cannot buy digital assets with fiat currency,
nor can you trade fiat currency or withdraw money from your bank account through decentralized exchanges.
Some of the benefits of DEXs include a lack of intermediaries,
protection from market manipulation, and anonymity.
They also offer faster and cheaper transactions than centralized exchanges.
There are two main types of DEXs; liquidity pool-based DEXs and order book-based DEXs.
Order book-based DEXs use an order book to keep all buy and sell orders for an asset in one place.
The user’s assets are kept off-chain,
but transaction information is kept in an order book on the blockchain.
This enables faster transactions.
Some examples of order book-based DEXs are Loopring, Idex, and PolkaDEX.
A liquidity pool-based DEX is a pool of crypto funds locked in smart contracts.
They allow users to trade assets in a decentralized, efficient,
permissionless manner and allow investors to earn interest on their holdings.
Some examples of liquidity pool-based DEXs are Uniswap, Kyber, Balancer, and Bancor.
Derivatives in the world of decentralized finance are contracts whose value is derived from the performance of the underlying financial asset.
These underlying assets include commodities, stocks, interest rates, bonds, currencies, market indices, and more.
The main difference between Defi and Ceci derivatives is that the Defi derivatives market allows anyone to create contracts linked to assets,
whereas CeFi derivatives can only be created by a central authority.
Additionally, Defi derivatives are more accessible because they do not require users to provide proof of identity or qualifications.
The main Defi application in this space is Synthetix.
Synthetix is a decentralized platform that provides on-chain exposure to different assets.
Similar to traditional finance, Defi crypto margin trading refers to using borrowed funds to increase a position in an asset.
The financial assets being traded become collateral for the loan.
Margin trading has two main components; leverage and short selling.
Leverage is when traders borrow assets to increase the number of assets they trade.
Short selling is when a trader borrows an asset to sell it in anticipation of a drop in the asset’s value.
Fulcrum and dy/dx are examples of crypto margin trading platforms.
2. Insurance
Insurance is an aspect of centralized finance that can be replicated in a decentralized ecosystem.
It ensures guaranteed compensation in exchange for paying premiums.
In the Defi space, insurance is often used to protect deposits and prevent smart contracts from failing.
Popular items in this category include Nexus Mutual and Open.
With Defi lending, investors deposit fiat currency through a decentralized application,
and then someone can borrow over the network,
paying interest on the loan.
A stablecoin is a cryptocurrency whose value is pegged to another asset, such as a fiat currency,
an exchange-traded commodity, or another cryptocurrency.
Decentralized exchanges are cryptocurrency exchanges that connect buyers and sellers and allow users to transact over peer-to-peer networks.
Derivatives in the world of decentralized finance are contracts (anyone can create) whose value is derived from the performance of the underlying financial asset.
Crypto margin trading is the use of borrowed funds to increase a position in an asset. Defi insurance ensures indemnity guarantees in exchange for paying premiums.