In simple terms, DeFi is a decentralized financial infrastructure built on a blockchain network.
DeFi’s main cryptocurrency applications are Bitcoin and Ethereum, which are controlled by a network of computers, rather than a financial institution. This means that there are no third parties or intermediaries involved in accessing users’ financial data, which gives the user more autonomy versus a traditional banking institution.
DeFi is set to be taking over the financial services industry, primarily because of its global accessibility. No one can be denied service. They operate an open and decentralized marketplace, meaning there are no third parties to oversee and implement withdrawal fees, identify verification, or sign ups. Moreover, DeFi does not issue credit checks.
Decentralized platforms built on the blockchain also make a transaction permanent, which make them very different from traditional banking platforms. Moreover, there is no one party that verifies the validity of each transaction.
Instead of using intermediaries to verify commitments, smart contracts are issued. Smart contracts are an agreement created by the buyer and seller via computer code on the blockchain network. The code executes when the conditions in the contract are triggered, for example, if there is an expiry date or a payment to be issued.
Current Value of DeFi Market
DeFi has become the most promising growth area in crypto industry. According to the tracker website DeFi Pulse, the Total Value Locked (USD) hits the all-time-high of $979.5M as of February 6th, 2020.
Understanding the Market: Current Trending DeFi Projects
MakerDao
MakerDao is a decentralized credit platform that uses DAI, a stablecoin whose value matches the U.S. Dollar. It is the number one stablecoin being used on the Ethereum chain. It can also be used as debt against ETH collateral. DAI’s accruing interest is paid through MakerDao’s other token, MKR. Holders of MKR have voting power on DAI’s interest rate.
Statistics
Synthetix
Synthetix is a platform that uses Synths (SNX), as in, assets that follow the value of real-world assets (fiat currencies, commodities, and crypto assets). They are the second most traded token on the Ethereum chain.
Risks
As with any new online platform, decentralized finance does come with some risk. First and foremost, there are some technical risks associated with DeFi. Smart Contracts might be susceptible to bugs. Without third party insurance, companies need to provide emergent solutions to prevent a potential breach.
Because applicants are not required to present their credit scores prior to banking, there are also risks associated with the lack of identity and regulation in the market. Therefore, crypto companies have to find other means of verifying an applicant’s profile (rent, phone payments, bank account information), which could lead to over-collateralization.
Another risk of not having intermediaries or third-party involvement is the lack of standards in practice in place. When there is no standard of practice or regulatory body monitoring investor’s holdings, it is unclear what would happen if holdings of cryptocurrency were stolen or tampered with.
Trends & Newcomers
There are few new key players entering the DeFi ecosystem.
Compound allows users to supply assets to their own liquidity pool and lets them continuously earn compounding interest. InstaDApp is a beginner’s platform that lets users manage CDPs, get rid of or add collateral, monitor CDP activity, as well as perform other transactions. pTokens are different then the Ethereum token, because they connect different blockchain patterns which enhances usability between each DApps.
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