DEFI — A new way of Financing

“DeFi boom is a very near equivalent of an apocalyptic event for the traditional financial institutions” ― Mohith Agadi

Bitcoin and much other digital-native equity stand out from legacy digital payment methods, such as those race by Visa and PayPal, in that they abolish all middlemen from transactions.

Ethereum applications

That’s because Ethereum’s platform for smart contracts — which naturally assassinate transactions if some conditions are met — offers much more flexibility. Ethereum programming languages, such as Solidity, are arranged explicitly for creating and deploying such smart contracts.

With smart contracts, dozens of Defi applications are performing on Ethereum, some of which are explored below. Ethereum 2.0, a coming boost to Ethereum’s underlying network, could give these apps a boost by chipping away at Ethereum’s scalability issues.

Ethereum is the excellent foundation for Defi for several reasons:

• No one owns Ethereum or the smart contracts that live on it — this allows everyone to need Defi. This also means no one can change the law on you.
• Defi products all communicate the same language behind the scenes: Ethereum. This means many of the products manage together seamlessly. You can give tokens on one platform and exchange the interest-bearing token in a different market on a separate application. This is like being able to cash faith points in at your bank.
• Tokens and cryptocurrency are made into Ethereum, a shared ledger — keeping track of transactions and ownership is a kind of Ethereum’s thing.
• Ethereum allows complete financial freedom — most products will never take custody of your funds, leaving you in control.

The most beloved types of Defi applications include:

• Decentralized exchanges (DEXs): Discussions help buyers exchange currencies for other currencies, whether U.S. dollars for bitcoin or ether for DAI. DEXs are a popular type of exchange, which connects buyers directly to deal with cryptocurrencies without trusting an intermediary with their money.
• Stablecoins: A cryptocurrency that’s tied to a resource outside of cryptocurrency (the dollar or euro, for example) to maintain the cost.
• Lending platforms: These platforms benefit smart contracts to change intermediaries such as banks that manage lending in the middle.
• “Yield farming” is a reward scheme that that’s taken hold in the Defi crypto world over the last year. Suppose you want to compare it to traditional investing; it’s like the yield on a bond or a dividend. It is arguably one of the prominent factors investors are not using Algorand buy Algorand, among others.
• Liquidity mining is a type of yield farming in which buyers of a decentralized finance (Defi) product acquire an additional token on top of the regularly expected yield just for putting assets into a liquidity pool.

Defi vs traditional finance

One of the best ways to see the possibility of Defi is to understand the problems that exist today.

• Some people aren’t granted entry to set up a bank account or use financial services.
• Lack of access to financial services can prevent people from being employable.
• Financial assistance can block you from getting paid.
• A hidden charge of financial services is your data.
• Governments and centralized institutions can close down markets at will.
• Trading hours are often limited to business hours of a specific time zone.
• Money transfers can take days due to internal human processes.
• There’s a premium to financial services because intermediary institutions need their cut.

What can you do with Defi?

There’s a decentralized way to most financial services. But Ethereum also creates ways for creating entirely new financial products. This is an ever-growing list.

Send money around the globe quickly.

As a blockchain, Ethereum is made for sending transactions securely and globally. Like Bitcoin, Ethereum allows sending money around the world very easily.

Stream money around the globe…

You can also flow money in Ethereum. This lets you pay someone their earnings by the second, giving them entry to their money whenever they require it.

Borrowing

Borrowing money from decentralized providers comes in 2 main ways.

• Peer-to-peer, meaning a borrower will acquire directly from a specific lender.
• Pool-based where loan providers provide funds (liquidity) to a pool that borrowers can acquire from.

Borrowing with privacy

The decentralized loan works without either party having to identify themselves. Instead, the borrower must put up security that the lender will automatically receive if their loan is not repaid with the help of smart contracts. Some loan providers even accept NFTs as collateral.

Fund your ideas

Ethereum is an ideal way for crowdfunding:

• A potential investor can come from anywhere — Ethereum and its tokens are open to everyone.
• It’s transparent so startups can prove how much money has been raised. You can even check how funds are being spent later down the line.

Insurance

Decentralized insurance allows to make insurance cheaper, faster to pay out, and more transparent. With more automation, coverage is more limited, and pay-outs are a lot quicker. The data used to take action on your claim is entirely transparent.

You can think of Defi in layers:

1. The blockchain — Ethereum stores the transaction history and state of accounts.
2. The assets — ETH and the other tokens (currencies).
3. The protocols — smart contracts that allow the functionality.
4. The applications — the products we use to manage and access the protocols.

Birthvenue has been working towards adding value to India’s blockchain ecosystem by contributing through our enterprise solutions work and our learning and development division. We have built platforms to accommodate multiple use cases and deliver solutions through robust partnerships with industry leaders.

Reach out to us at admin@birthvenue.in to discuss any potential ideas you might have. We will be able to actualize those ideas for you and bring them close to fruition.

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This is a post in our Medium blog, ‘Blockchain for Everyone.’

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