What is DeFi? Learn more about Decentralized Finance
What is DeFi? This term is an abbreviation for Decentralized Finance, sometimes also called Open Finance. It refers to a huge range of cryptocurrency financial applications that distance themselves from traditional institutions such as banks, credit companies, and traditional investment brokers.
imagine you make a loan to a complete stranger on the other side of the world,
in a safe and transparent environment, while receiving interest. Another
example would be having income just by having cryptocurrencies in your virtual
wallet. Or, letting a robot trade
cryptocurrencies for you based on the best quotes on the market.
All this is already a reality thanks to DeFi. According to the DefiPulsewebsite, more than $1 billion has been invested in decentralized finance technologies. Open finance platforms promise to end the high cost of intermediaries, offer new services to people who do not have access to banks, and create new ones by using an innovative combination of open source software, smart contracts, and cryptocurrencies. Some ways to better leverage your money.
We will explain
what DeFi is, its main features, and point out some of its most innovative
services on the market.
DeFi: Main characteristics of decentralized finance
investments, and services are not coordinated by a central institution, with
employees and rules of conduct, but by algorithms. Thanks to smart contract
technology, two or more people can sign contracts without the need for a third
party. The terms of the contract are made entirely by a computer.
This is useful for
establishing the terms of a loan or to automatically decide the best conditions
for exchange between cryptocurrencies.
Open source is essential for DeFi
services to work properly. It allows the user community to check the contract
conditions, as well as to look for errors or security flaws in the code. The
practice of looking for errors or failures is known as an audit. This allows a substantial improvement of DeFi services.
People anywhere in the world can use
DeFi services. Open Finance services are exactly the same whether in Venezuela,
Norway or Mongolia.
Also, anyone having
a good knowledge of programming and code can create their decentralized finance
service, regardless of permissions from governments, banks, etc.
What is DeFi: Open Finance
Stablecoin and decentralized bank
The MakerDAOproject has become one of the main pillars of DeFi since the release of its stable value cryptocurrency: the DAI.
This currency has a 1 to 1 parity with the US dollar, 1DAI = 1USD. However, unlike other stablecoins, the value of the DAI is not backed by a “bank account” in USD, but by other cryptocurrencies.
protocol uses a refined system of loans and automated payments, which ensures
that the value of the currency remains stable. Anyone can lend their own
cryptocurrencies to the protocol, gaining interest with it. Currently, it is
possible to get about 8% per year.
objective of this company is to become a kind of decentralized bank. All decisions on the MakerDao platform are made
by the user community itself. They vote on the annual interest value, minimum
deposits, etc. For this, the user must have another currency, called MKR, in
You can lend your
cryptocurrencies to other people and receive interest. Or, borrow crypto and
pay it back later. All this without a third party, such as a bank or a credit
The loan is not
made directly between users but is made or taken from a market known as liquidity pool. The interest rate is
defined according to the laws of supply and demand: if there are many lenders,
interest tends to fall. If there are many borrowers, the trend is upward.
The user must have
at least a 150% guarantee on the amount requested to borrow on these platforms.
From then on, smart contracts take control: charging interest, applying
Trading your own cryptocurrencies can be stressful. Besides having good luck, you need to study how the market operates, design strategies, master the innumerable functions of buying and selling on exchange platforms, etc.
However, there are decentralized ways to automate your own trading. For example, on the TokenSetsplatform, it is possible to buy bots with automated strategies, which will do the buying and selling operations according to predefined strategies. The robots themselves are valued or devalued according to the laws of supply and demand.
Moreover, it is
possible to copy the portfolio of successful traders in a practice known as Social Trading. All actions performed by
professional traders will be automatically replicated in the user’s own
wallets. These traders are classified on the platform according to their degree
of success in recent times.
Conclusion – DeFi, decentralized finance or Open Finance: New possibilities for cryptocurrencies
decentralized finance market has exceeded its first billion dollars. This is
only the beginning. The possibility of eliminating intermediaries, making or
taking loans in a simple and non-bureaucratic way, and trading without much
technical knowledge promise to attract more and more people to the crypto
world. These opportunities could provide new ways of generating wealth.
market is still in its early days and is not immune to hacker attacks,
failures, and unforeseen events. In this sense, doing your own research is
essential to taking advantage of the opportunities offered by the DeFi market.
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