[Learn] Appearance of a revolutionized service, DeFi

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We believe that the year of 2021 is a year that the blockchain market has become more familiar to people and the public.
The market size is growing, and various blockchain projects have been released at this moment.
It is significant to follow the flow of the market for the people who are about to enter the blockchain ecosystem and are already participating.

NEOPIN will discuss 6 articles of how the blockchain ecosystem has expanded from its history.
We are going to discuss the keywords of the blockchain ecosystem.
We hope that you can prepare for the upcoming blockchain market in 2022.

[1] Appearance of a revolutionized service, DeFi

2017: Appearance of DEX

DEX (Decentralized exchange)

A cryptocurrency exchange that is currently familiar to the public is “CEX (Centralized Exchange)”.
The centralized system has full authority over the operation of exchanges.
On the other hand, “DEX (Decentralized Exchange)” is an exchange that aims for Peer-to-Peer (P2P) transactions based on an algorithm of DAO (Decentralized Autonomous organization).

EtherDelta, Relay, Allbit and more DEXs were released in the beginning, but they are mostly forgotten from the blockchain market because the rise of technological limitation struck their businesses from slow transaction speed while trading, managing individual wallets, accessing accessibility, and etc. Over time, these DEXs become the initial model of AMM (Automated Market Market) in the DeFi market in 2020.

2018~2019: The first appearance of DeFi

※ DeFi (Decentralized finance) : it stands for decentralized finance, which refers to financial services in the blockchain ecosystem, and it is similar to financial services by banks such as savings, deposits, loans, and collateral). The difference between DeFi and traditional financial services is the presence or absence of intermediaries in transactions.
It would be easier to understand DeFi in comparison with bank services.

The first DeFi presentes by MarketDAO

MarkerDAO is the first DeFi blockchain project in the end of 2017, which was the continuation of the blockchain market.
The summary of MarkerDAO’s DeFi system is in 2 steps s as follows:

Step 1: Cryptocurrency(collateral) → Deposit into MakerDAO vault
Step 2: Issue DAI (stable coin) after setting the loan ratio of the total amount of collateral.

You can use your virtual assets to execute mortgage loans on your own without a centralized institution like a bank.
MarkerDAO’s attempt was the first example of the financial service in the blockchain ecosystem, which attracted the participants and became a guideline for various DeFi protocols to be released.

※ Stablecoin: $1=1 stable coin, it is pegged to a currency like the U.S. dollar.

2020~2021: Activation of the DeFi market

Consecutive success of the latecomers of DeFi

Many DeFi protocols released after MakerDAO such as Compound, Aave also provide the loan services, and they reward tokens that have the right of decision making in managing a project to users.

The reward of the DeFi protocols is a very attractive destination of investment for low risk-high return (earning high interest compared to the traditional bank), which lowers the high risk of trading and makes a profit only by depositing virtual assets.
As the high interest rate of the DeFi market has been publicized, funds from many people and institutions have explosively been invested.
The market capitalization of major DeFi protocols including MakerDAO grew rapidly and reached the top of the market.

The ultimate revival of DEX: AMM and Uniswap

The new form of DEX (Decentralized Exchange) appeared in 2017 is AMM (Automated Market Maker), and it is the most innovative example in DeFi.

※ AMM (Automated Market Maker): As a new form of a DEX, it is mostly similar to the concept of a currency exchange.
As Order books are unavailable on AMM, you can exchange A coin to B coin by paying a fee (currency reflected by a current market price).

The biggest advantage of Uniswap is that it does not charge any listing fees for any ERC-20 token.
By trading a promising project’s token in advance before listing on a centralized exchange, many users seeking preemption effects gradually shifted the proportion of transactions to AMM.
It led to the growth of the DeFi market.

※ Uniswap: It is a DEX protocol built on AMM that users can exchange Ethereum(ETH) and ERC-20 token directly without a fee.
If you connect an individual decentralized wallet (Metamask, Trustwallet, etc.) to the protocol, you can make P2P transactions by paying fees without intermediaries.

AMM, the operating mechanism of Uniswap

Most AMM protocol services released until 2021 benchmarked the mechanism of Uniswap.
The components are similar, let me tell you more about the operating mechanism.
The details of it as follows:

The AMM’s transaction method is the concept of a cryptocurrency exchange.
- If token A is exchanged to token B, it is exchanged under the exchange ratio by the market value evaluated by AMM.
- There will be a fee for token exchange. (AMM’s revenue model)

In a liquidity pool run by AMM, the amount of a token may not be enough for exchange.
(* If the token to be exchanged is insufficient, loss of amount appeared due to slippage tolerance.)

※ Slippage: it is the price difference between when you submit a transaction and when the transaction is confirmed.

If individuals/institutions directly supply a virtual asset to the pool, they earn rewards as an AMM’s governance token (e.g.: UNI token for Uniswap).

Anyone who owns Uni tokens can suggest operations related to Uniswap. (e.g.: adjusting the rate of fees, the reward incentive rate of Uni token, etc.)
- By using Uni tokens owned by Individuals/institutions, they are allowed to participate in the vote.

Most of the DEX protocols currently released have built virtual asset P2P transactions using the mechanism of AMM as the basis of the DeFi service.

We have discussed the current trends and history of DeFi.

At the beginning of its appearance, the DeFi market was strictly evaluated and misunderstood as a Ponzi scheme, but DeFi has been recognized as the mainstream for the next generation due to the appearance of the updated versions.
It has currently become a significant part of the blockchain ecosystem and spotlighted from global financial institutions.

In the next post, we will discuss “why the blockchain market became enthusiastic about DeFi and how the market is changed by DeFi”.

Thank you for reading our post.🙏
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