What Is DeFi?
Until recently, the financial services industry was centralized. Banks, exchanges, credit companies had a single administration that manages all processes. The situation changed after the advent of decentralized services. To understand what is DeFi, one needs to imagine a financial institution that is not managed by managers, but by the clients themselves. This format of interaction can not only increase the privacy and security of users, but also simplify financial transactions and reduce the costs of the parties.
Decentralized financial services (DeFi) are network projects based on the equality of their participants. Decentralized finance services perform the same functions as traditional financial institutions (banks, payments systems, exchanges, credit centers). But each member of the community simultaneously acts as a subject that processes the transactions of other clients.
Commissions and fees are charged for using the services of decentralized platforms. This money is distributed among community members (investors, traders) and developers. Usually, the creators of the project receive income from the issuance and subsequent sale of native tokens, which can be sold as the platform develops.
The main advantage of decentralized networks is the freedom and independence of users. Exchange clients do not risk losing money due to the arbitrariness of the administration, and borrowers know that their loan application will be approved automatically.
What Is a DeFi Crypto Model?
Any DeFi project needs two components: a chain of blocks for storing information and an application that processes transactions. DeFi is compatible with many blockchains.
The main principle of distributed financial transactions is the absence of a single center that checks and approves transactions. Transfers and transactions within platforms are usually implemented through smart contracts – algorithms entered into the blockchain that fix the conditions accepted by the parties.
Since the program itself cannot receive information from third-party sources, oracles are used to connect the network with the outside world – services that provide data to DeFi communities.This process can be described using prediction markets as an example:
The parties make a bet on the probability of the outcome of an event (election, contest, sports match). Transaction data is entered into the blockchain using a smart contract and confirmed by other participants. The oracle, according to a predetermined algorithm, finds information about the outcome of the event and, through an automatic interface (API), transmits it to computers connected to the cryptoplatform.
The received data is added to the smart contract, and the result of the bet is calculated. The network automatically determines which of the participants in the dispute won. The results of the transaction are entered into the blockchain. The winner is rewarded.
What Is DeFi Crypto User Base?
Demand for distributed protocols is supported by:
Developers
The creation of protocols in the field of distributed finance provides several advantages. The high interest in distributed network protocols makes it profitable to develop new applications and algorithms. In addition, this area is free from legal restrictions: new projects can be launched without opening offices, obtaining licenses and permits. Developers have the right to create any protocol and profit from its use.
Investors
P2P financing opens up a number of investment opportunities:
Providing liquidity to exchanges and exchange services. Unlike centralized sites, the operation of DEX requires investments from the users themselves. In return, investors receive favorable interest rates, and in some cases additional income from the sale of exchange tokens.
Cryptocurrency loans. Users can issue loans at high interest rates. Plus, earning on DeFi is providing money as collateral for the borrower. Most often it is Ethereum (ETH).
Purchase of tokenized shares and other assets. Many technology startups are attracting investors through distributed networks.
Traders
Decentralized exchanges are attractive due to the lack of legal restrictions. In addition, distributed algorithms are considered more secure, since only the owner of the wallet has access to the tokens. At the same time, the DEX exchange has a number of disadvantages compared to traditional exchanges:
Relatively low liquidity ratios.
Small selection of available assets. For each trading pair, it is necessary to create separate liquidity pools filled by other users.
Slow transaction processing speed. All transactions are tied to the blockchain, which usually has a limited speed. Although building platforms on new registries largely solves this problem.
Making Money on DeFi Crypto What Is It
Ways to generate income are constantly expanding.
Yield farming (profitable farming). Investors profit from depositing tokens into liquidity pools. As a reward, users are given DeFi coins that can be exchanged for other cryptocurrencies and used as a voting token within the ecosystem.
P2P lending. The owner of the coins can transfer them to other users at a predetermined percentage. The repayment of the loan is secured by collateral, which is blocked by the platform.
Investments in native platform tokens. DeFi coins can actively grow in price amid growing interest in distributed protocols.
What Is DeFi in Cryptocurrency Description
The first decentralized platforms worked in the field of landing and cryptocurrency exchange. The list of new areas of DeFi projects include:
Prediction markets
Almost any prediction can be created through smart contracts. The main condition for making a bet is the presence of the opposite point of view of the parties and the ability to check the outcome of the dispute automatically.
Stablecoins
One of the disadvantages of cryptocurrencies is high volatility (fluctuations in market rates). This problem was partially solved with the advent of stablecoins – tokens backed by fiat money or other assets. The first stablecoins were created by centralized companies. Fiat currencies or banking metals held on the issuer's accounts acted as collateral. Decentralized platforms allow you to create stablecoins in an algorithmic way:
With the help of a smart contract, the blockchain specifies the order in which DeFi tokens will be transferred to the buyer in exchange for the crypto assets contributed to the pool.
The exchange of Bitcoin, ETH and other deposited coins for stablecoins is carried out at a fixed rate.
During a reverse transaction (sale of decentralized tokens), the exchange withdraws and burns these assets to avoid inflation.
Tokenized shares
Today, any investment instrument can be digitized using smart contracts. DeFi platforms allow you to exchange cryptocurrencies for tokens algorithmically linked to the quotes of securities of real companies.This opens up the opportunity to earn on changes in the price of shares without creating an account on the stock exchange or with official brokers.
Asset management
The purchase of securities involves the risk of loss due to the decline in the performance of the selected company. Experienced investors spread their investments across several assets. In the offline sphere, such services are provided by management companies and funds (ETFs). DeFi platforms allow you to use assets without an intermediary.
Platforms for issuing tokens and investing
The disadvantage of crypto trading is the high volatility of digital asset quotes. The rate of BTC, ETH and other coins has repeatedly shown sharp collapses. In such conditions, traders try to reduce risks by simultaneously transferring part of the capital to other markets: fiat currencies, commodities, gold. DeFi makes it easy to trade assets.
Escrow services
This type of transaction means that the seller receives payment only after the third (neutral) party is satisfied with the fulfillment of obligations to the buyer. Smart contracts make the work of escrow services automatic:
The parties discuss the terms of the contract and sign the corresponding smart contract. The buyer (customer) transfers crypto assets.
The seller (executor) provides the guarantor with evidence of the completed work or delivery.
The site, using special algorithms and a system of oracles, checks obligations fulfillment. If both parties follow the terms, the funds are transferred to the seller. In the event that the buyer has not received his order, the money is returned to his wallet.
Exchanges and exchangers
DeFi in crypto allows you to anonymously buy and sell digital assets, regardless of where the user lives. Distributed exchanges can work in several ways:
A single glass of orders. Buy and sell orders are entered into the blockchain and matched each time a block is added.
Liquidity pools. For each trading pair, a separate address is created that accepts transfers. Usually, two types of assets are deposited into the pool at the same time: altcoins and DeFi tokens. Orders are executed at a fixed rate, which is regularly recalculated by the platform itself.
Aggregators. Redirect users to sites that offer the most favorable rate for the selected trading pair.
