- December 9, 2020
- Posted by: Lara Tlass
- Category: Blog
Interest and adaptation of DeFi really exploded in early 2020 and as of November 12th, the total value locked in DeFi sector hit 13.62 Billion dollars. The increase in interest is due to many factors; the access to funds has never been easier with decentralized economic facilities, bringing a greater amount of transparency as compared to centralized authorities. Everything is done digitally and online with no paperwork and without several visits to the bank when requesting a loan, it’s also borderless! You can request a loan and get approved instantly all through a lending DeFi app while you are on a bus ride anywhere in the world all protected and secured by the protocols and smart contracts on the blockchain. There are several DeFi platforms that cater for various financial related services without the need for middlemen, banks or brokers, let’s explore a few of them.
DeFi, short for Decentralized Finance is a form of finance that does not rely on traditional central financial intermediaries such as brokers, banks or exchanges that are controlled by a single, central source. Instead, it utilizes blockchains such as Ethereum and it’s trusted Smart Contracts to carry agreements and transactions via dAPPs (Decentralized Applications).
Lending & Earning platforms.
Traditionally, only the banking system and bankers would allow you to earn interest from your saved funds with interest rates anywhere between 0.1% to 5% in some countries and only banks and bankers can approve to lend money with several terms & conditions in place with interest rates from 5.5% up to 32%.
DeFi now allows the common person to earn interest by lending out their cryptocurrencies on dApps such as Blockfi, Crypto.com and Celsius to name a few, where they are able to stake major coins such as Bitcoin, Ethereum and stable coins like Tether (USDT) and receive returns between 5.25% to 21% per year. The other advantage is that the terms are flexible, meaning you can un-stake your cryptos at any time, unlike banks with a fixed deposit term. Billions of dollars have been staked as people have realized that they can now earn passive income with their cryptos that have been stored in their wallets not generating any income, now they are able to loan their cryptos out.
DeFi lending is collateral-based, meaning when taking out a loan from DeFi platforms, the users are required to put up collateral, typically Ethereum or Bitcoin. The users are not required to give out their credit score or I.D to take out a loan, which traditional centralized institutes operate.
DEX, short for Decentralized exchanges was designed to tackle trust issues with centralized crypto exchanges. Centralized exchanges are vulnerable to hack as they keep their systems off-chain and operate as escrows for their users with transactions, without having a ledger on the blockchain which leads to weak security of information and funds. As we move towards a trustless economy without the need of third parties to exchange goods, DEX enable users to remain in control of their funds by operating all transactions and storage functions on the blockchain which means that users’ funds and personal data are safe.
The other core advantage decentralized exchanges provide is a seamless trading experience, some centralized exchanges have the capability to manipulate the market and order books, have trading bots and the popular “Exchange under maintenance” that in some cases lasts several weeks and disables you from accessing the platform and your funds. The fees could also be high in centralized exchanges with high trading cost and withdrawal fee. With DEX, the exchange is always running as long as the blockchain is running and fees are much lower.
DeFi payment solution was introduced to create an open finance ecosystem to facilitate the unbanked, underbanked and the everyday consumer. DeFi payments offer swift and secure transactions powered by programmable smart contracts. There are several blockchain-based payment providers like OmiseGO, TenX and Request Network, requesting and receiving payments via Request Network is quite simple and takes only three steps… User ‘A’ sends a request to receive X amount to user B, user B then approves the request in a single click, User ‘A’ then receives the amount. MCO Card by Visa, and BitPay Card by Mastercard both work on ‘’Fund it with Crypto, Spend it as fiat’’, and they are lower in fees than a standard credit/debit card with many rewards and loyalty programs such as Airmiles and free subscription on Netflix and Spotify.
Defi marketplace is gaining popularity in recent times and is a different way to do online commerce. It’s a peer-to-peer application that doesn’t require middlemen, which means no fees & no restrictions. Data is distributed across the network instead of storing it in a central database. OpenBazaar, a DeFi marketplace, is not a company nor an organization; it’s a free open-source software built to provide everyone with the ability to buy and sell freely, nobody has control over OpenBazaar. Each user contributes to the network equally and is in control of their own store and private data where user can sell and buy music, games, art, clothes, electronics, international goods, local food and beverages by paying and receiving cryptocurrencies without a platform and listing fees that usually go to the middlemen or the company; all transactions are protected and secured by Smart Contracts, this trustless ecosystem could be the norm in the near future.
DeFi has opened the doors for many industries such as infrastructure and dev tooling, asset management, KYC & Identity, margin trading, prediction markets, derivatives, insurance, tokenization & management of assets, analytics, and crowdfunding.
Blockchains are a collective of scalable blocks linked with each other. Likewise, the DeFi system takes a scalable approach. Every new Defi service or software is a separate module, and when combining them, they can make interesting solution to the financial space. Most Defi projects and services are built on the Ethereum network and are considered new, nevertheless both still have problems such as speed and scalability; the introduction of Ethereum 2.0, an upgrade to Ethereum’s underlying network, could give these apps a boost by rectifying these problems.
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