What is decentralized finance and why is it important?
The world around us is never static, it is constantly in motion. However, we do not perceive the development, but we know that it takes place in these minutes as well. This development is also present in the financial world, the last important moment of which was undoubtedly the appearance of the blockchain. Decentralized finance, or DeFi for short, is the name of a category of businesses. By these projects, we are understanding traditional financial services that have moved to the blockchain. The Bitcoin blockchain has solved the problem of double payment through its decentralized, peer-to-peer network. This kind of decentralized network, the blockchain, is increasingly infiltrating and transforming traditional financial systems and here we are not just thinking about cryptocurrencies. The immutable and transparent nature of blockchain technology makes it attractive to the financial sector. This was also recognized by the largest bank in the United States, JP Morgan, when it announced the development of JPM Coin.
Another extremely important innovation was needed to advance DeFi: the smart contract.
Smart contracts allow us to guarantee the implementation of the agreement without an intermediary. These are actually computer programs that execute the smart contract according to the programmed conditions. For example, if the debtor does not pay, at the specified time, the smart contract liquidates the cryptocurrency left as collateral and the creditor leaves the legal relationship. Decentralized finance was heavily built on the Ethereum blockchain. This is because Ethereum is the best-known blockchain that supports smart contracts.
A business can grow linearly or, better yet, exponentially if the market itself is growing. In the coming decades, we will see more and more electric cars and fewer and fewer diesel cars. It is clear that a growing market for young electric cars would be a better choice in terms of investment.
Is DeFi growing?
Defipulse, a website where you can keep track of evaluations of current DeFi protocols and how much money is currently locked in these projects.
Decentralized finance has undergone significant growth over the past 2 years. The total amount in dollars is $ 3.97 billion, which has been locked into DeFi projects. However, that number on June 16th, 2020 was still just over 1 billion. So in just over 2 months, the amount of money tied up in the DeFi ecosystem has nearly quadrupled.
Gone are the days when cryptocurrencies were used only for pure speculation. Today, the blockchain is the basis of many businesses. This is especially true for the Ethereum blockchain. According to Defipulse, the number one DeFi project is Maker. This business dominates more than 30% of the locked money.
Collateralized Debt Position
Users transfer funds to the smart contract as collateral for a loan. After the transfer, the user can generate an equal amount in DAI form, which is the Stablecoin of Maker. He or she is then free to use the generated DAIs. At the same time, the user undertakes to repay the DAI value. If this does not happen at maturity, the collateral will be given to the lender. Performance is guaranteed by a smart contract.
This creates a new form of lending, which is not yet equivalent to taking a loan from a bank to buy an apartment.
LoanScan, a website used to compare interest paid on DeFi projects. According to this, we can see that we can get quite good interest rates for cryptocurrencies from 0.5% up to 8%. With current bank interest rates, it’s quite uplifting to see an opportunity to pay such an interest for our money somewhere.
Decentralized finance is growing day by day. Newer projects appear and old ones continue to evolve. In the coming decades, as roads are covered by electric cars, finances will also be filled with services that have moved to a blockchain.
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