Monday, June 27, 2022

What is DeFi: everything you need to know in 2022

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Last year, DeFi (Decentralized Finance) became one of the most dynamically developing segments of the cryptocurrency market. The total amount of funds blocked in DeFi protocols was approximately $180 billion. Last year, some DeFi Tokens proved to be extremely profitable, and their owners were able to increase their profits tenfold.

According to analysts at the Chainalysis portal, the monthly volume of DeFi trades was about $80 billion last year.

The leading countries in the use of DeFi are the US, China, England and Vietnam.

What is DeFi

DeFi is an analogue of classic financial instruments created in a decentralized architecture. There is also such a definition of DeFi. These are application ecosystems that provide financial services based on their distribution networks.

DeFi was first introduced in 2017. Danish programmer Rune Christensen has launched the MakerDAO platform. It is considered the first decentralized credit service. In the same year, the EtherDelta platform was created. Users can exchange Coins am working on it.

The first DeFi was developed based on the Ethereum blockchain. As the data from the DeFi Llama portal shows, in 2021 seven out of ten DeFi applications were running on the Ethereum blockchain. Now more and more decentralized applications are related to other blockchains, for example:

  • Solana
  • Binance
  • smart chain
  • heko.

What is the difference between DeFi and Classical Finance?

A standard bank transfer between countries can take 1-2 days and you have to pay a high commission for it. The transfer in a decentralized financial application is carried out within seconds, the commission is a few cents.

Banks have many restrictions for companies and individuals who want to take out loans. Unlike them, a decentralized financial application can be used by any user, he only needs access to the Internet.

Banks have a cumbersome centralized management system that hinders the efficient distribution of resources. The DeFi protocol is fully decentralized, allowing the ecosystem to be flexible and adapt more quickly to changing market conditions.

Unlike banks, where the client does not know how the profit distribution and management system works, DeFi is completely transparent as the source codes created on the basis of blockchains are accessible to any user and audit.

How does DeFi work?

For example, you can specify the MakerDAO site. The investor invests in the project, he gets MKR tokens. Thanks to them, he gets voting rights when making decisions about further project management. The user who needs a loan transfers ETH as collateral to the site. He gets stable coins from DAI.

After the borrower returns the loan, his ETH is returned to him. In turn, the DAI tokens are taken through the protocol and burned. The fee that the borrower pays for the use of the loan is divided among the investors.

Tools implemented in DeFi

In decentralized applications, stablecoins are created and then applied (tokens pegged to the price of other assets in a 1:1 ratio. An example of a DAI stablecoin pegged to the US dollar price.

Credits are implemented in DeFi. The customer can make a loan secured with cryptocurrencies, make a loan to another user. Loans are issued in stablecoins and other virtual currencies.

Decentralized finances allowed DEX to appear. For trading transactions on decentralized exchanges, there is no mandatory registration, to add a new token, you do not need to do a listing. One of the most famous is Uniswap.

DeFi helped develop the prediction, betting and lotteries market. Thanks to blockchain technology, lotteries and betting are transparent and fair. Users can see how likely this or that scenario is. Augur is considered to be one of the most famous forecasting markets.

With the help of decentralized funding, token issuing platforms have entered the market. Thanks to them, developers were able to attract additional funding. An example of such a platform is Aragon.

Payment platforms were created in DeFi and cryptocurrencies can be transferred to them almost instantly. This feature is implemented by Sablier, Lightning Network.

The most famous DeFi projects

Uniswap

It is designed to exchange various assets on Ethereum. Users can exchange tokens and provide liquidity to the protocol. Liquidity providers receive rewards from commissions. Users can also create their own liquidity pools.

Creator DAO

The DAI stable coin has been implemented on this credit platform. Users can open vaults and lock cryptocurrencies in them as collateral. Customers can borrow stablecoins. Holders of MKR tokens will be given the right to participate in protocol management.

Crop farming in DeFi

Profitable agriculture is also implemented in decentralized finance. This is the process of obtaining a native token by interacting with the DeFi protocol. The customer can receive them for providing liquidity to the landing protocol or decentralized exchange, to participate in the vote on the development of the protocol.

What is the risk of using decentralized financing?

There are certain risks to using DeFi. In particular, there is a risk that the value of the original cryptocurrency will be lowered in the protocol. The volatility can be too high, which can affect the work of projects and the ability to generate profits.

Also, loans in DeFi can still be obtained for a small amount, unlike a standard bank loan.

What are the future prospects for the development of DeFi in 2022

According to cryptocurrency investor and billionaire M. Roszak, the DeFi market could see significant growth in the coming year. He believes that a sharp rise in global inflation and the desire of mutual funds to achieve high returns will contribute to this. Some foundations like Grayscale are going to create special development units for DeFi applications like Aave.

Most likely, in 2022 and years to come, DeFi will be able to attract more institutional investors and make regulation more orderly. If decentralized platforms increase scalability, attract more liquidity, then the number of users using them will grow significantly, as will the total trading volumes on DeFi.

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