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.

For example, 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 DefiPulse website, 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.

What is DeFi: Main characteristics of decentralized finance

●        Decentralization

DeFi loans, 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.

●        Transparency

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.

●        Universalism

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 applications

MakerDAO: Stablecoin and decentralized bank

The MakerDAO project 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.

The MakerDAO 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.

The long-term 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 their wallet.

Loans

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 company.

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 penalties, etc.

Some main platforms are:

●        Compound;

●        Dharma;

●        dyDX;

●        LoanScan DeFi loan platform comparator

Decentralized trade

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 TokenSets platform, 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

Recently, the 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.

However, this 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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