Do you know what DeFi is?
The abbreviated term is used to refer to what is commonly called “decentralized finance”, or “open finance”, also referring to digital assets, decentralized applications, smart financial contracts and decentralized applications built in the Ethereum blockchain, or others that are compatible. In short, DeFi is a financial system built in the blockchain, that serves to operationalize many forms of financial interaction without a central controller.
DeFi, better to trust in code than in institutions
What is the difference between decentralized assets and traditional instruments like money?
It is always good to remember that money has not always existed as a means of exchange. Human beings originally exchanged goods and services for other goods and services, guided by mutual need. The problem is that matching how many knives is worth a cow is always a very difficult task. Money served as a common equivalent since ancient times so that developed economies could simplify the process of pricing the value of products on the market.
Later on, money helped to introduce new innovations, which further boosted the economy’s productivity. Over the years, the issuance of currencies ended up being concentrated in the national states, through central banks and other regulatory institutions.These authorities gave birth to an ecosystem of exchange in which all operations are ultimately regulated by a decision-making center.
This means that their money, contracts, financial information and securities investments are subject to the level of stability, reliability, privacy and security that these institutions are able to offer.
Defi proposes something better than all this
Instead of relying on central regulatory authorities, Defi applications aim to create a financial system open to all, self-regulated by auditable autonomous codes.
DeFi thus allows everyone to be responsible individually and collectively for their financial well-being. Through it, individuals are free to enter or leave transactions, without running the risks inherent to the actions of central agents subject to error or bad faith. In financial terms, this means getting rid of unexpected rates, inflation, confiscation, cyber invasions, among other headaches.
Most Defi applications are built on blockchains, mostly on the Ethereum network, perhaps the most popular in the world today.
Ethereum is a blockchain network that maintains a shared digital value ledger. Instead of a central authority, participants in the network control the issuance of ether (ETH), the network’s native cryptographic currency, which serves as an incentive for regulating transactions.
Developers can program applications in Ethereum that can create, store and manage digital assets, also called tokens, in the locking chain.
This is what is called intelligent contracts or decentralized applications (DApps), which run only as programmed. They allow the construction of irreversible complex agreements without the need of an intermediary.
The financial system that is established from these DApps is marked by trust, resilience, transparency and security. Most contracts are built to be open-source and interoperable with existing smart contracts.
Anyone with Internet access can access the blockchain. Thus, users can check the code of the smart contracts and choose which services work best for them.
There are already several Defi applications, with different quotes in the market. Here are some more famous examples:
Maker
MakerDAO is a decentralized credit platform on Ethereum that supports DAI, a stable currency whose value is indexed to the USD. Anyone can use MakerDAO to open a safe deposit box, deposit a collateral, for example using ETH or BAT, and generate DAI as debt against that collateral.
Currently the value in custody of the Maker contracts in Ethereum is US$ 451.9 million.
Synthetix
Synthetix has a native token called SNX. Holders can lock collateral tokens such as SNX and ETH to coin Synths, which are freely negotiable ERC20 tokens. Synths transaction fees exchanged on Synthetix non-custodial DEX (Synthetix.Exchange) go to SNX/Synth minters, encouraging the creation of Synth and giving value to the underlying collateral
Currently the value in custody of the Synthetix contracts on Ethereum is US$ 122.4 million.
Compound
Compound is an algorithmic protocol of the money market on Ethereum that allows users to accumulate income or borrow assets against collateral and pay interest. Anyone can provide assets to Compound’s liquidity pool and immediately start earning income on a continuous basis. Rates are automatically adjusted based on supply and demand.
Currently the value in custody in Compound’s Ethereum contracts is $97.9 million.
Aave
Aave (from the Finnish word for “ghost”) is a non-custodial open-source protocol on Ethereum for decentralized investment and lending. For lenders, the protocol wedges aTokens compatible with ERC20 to a 1:1 ratio for the assets provided. Interest immediately begins to accrue continuously, represented by a steady increase in the amount of aTokens held by the lender. Users can borrow against most of the assets provided; the guarantee ratio and liquidation threshold depends on the asset, as well as the liquidation penalty, which anyone can get as an unhealthy loan.
Currently, the value in custody in Aave’s Ethereum contracts is $55.7 million.
Uniwasp
Uniswap is a DEX (decentralized exchange). In short, it is a decentralized protocol in the chain for exchanging tokens on Ethereum that uses liquidity pools instead of order books. Anyone can quickly exchange ETHs with any ERC20 token or earn fees by providing any amount of liquidity. And anyone can create a market (i.e. liquidity pool) by providing an equivalent value of ETH and an ERC20 token.
Currently the operating value on Uniswap contracts on Ethereum is $43.3
Explore the world of DeFi applications
The entire DeFi market today is estimated to be worth around $870 million, according to defipulse.com . Ethereum has become the blockchain of choice for many teams to create financial products, and the news does not stop appearing in the market.
Want to know a little more about the possibilities? Contact us.
