One of the latest trends in the crypto industry is decentralized financial instruments (DeFi). This term unites services similar to classical financial instruments, only implemented in the blockchain. These include issuing cryptocurrencies, launching exchanges, maintaining accounts, transfers, and lending. The trend continues to gain momentum, and there is a reason for that - many are interested in innovative technologies and the economy of the future.
Working Principle & Features
Decentralized finance is an independent financial ecosystem that gives users complete control over their money: without the involvement of governments and banks. Blockchain technologies have played a key role in the implementation of this industry. Interaction in decentralized ecosystems occurs without intermediaries according to the P2P scheme, which allows market participants to independently cope with transactions.
- Censorship Resistance. Token custody, transfer, and exchange cannot be restricted by a handful of players responsible for the maintenance of the network.
- Programmable Assets. Assets that are handled on the product should have all the native attributes of conventional tokens on a decentralized network.
- Pseudonymity. Decentralized financial applications should be able to leverage web 3.0 standards for the signing of transactions and authentication. Thereby, drastically reducing the need for AML/KYC and making financial tools inclusive to a broader audience.
- Transparent & Trustless. The current custodian of an asset in a de-fi project should always be verifiable on the blockchain and its custody should only involve smart contracts and wallets. There should not be large, centralized, an exchange owned wallets in a de-fi product. In the presence of a smart contract, the code for the same should be open-sourced.
- Permissionless. Unlike “open-finance”, decentralized finance should allow anyone to create applications without the need for applications being approved by large, central banking authorities.
Why does DeFi gain popularity?
The monopoly of the state is a problem that is rather difficult to solve. The control that we have over our savings is only conditional, and in recent years this has been felt especially sharp. In many European countries, people are gradually phasing out cash and switching to electronic payments. Banks, constant control, and a lack of anonymity are disadvantages that DeFi does not have. Application developers cannot influence the money of the participants, and the latter independently manage their budget.
The benefits of decentralized finance are the following:
- Simplicity and availability of technology for ordinary people;
- Scalability and distribution of the registry, as a result - a more secure and resistant to technical errors system;
- Reduced costs of maintaining the system and lower commissions (or lack thereof).
- Versatility. DeFi can be used in almost any area of life.
Use Сases & Examples
- Mortgages & Insurance. The absence of intermediaries and transparency are the best conditions for issuing mortgage loans and insurance, including medical insurance. This category can include social benefits like pensions. At the same time, the quality of service and safety is ensured by the implementation of smart contracts, which allow replacing classic contracts and paperwork.
- Lending. Classic lending has a lot of restrictions. Requirements for the level of wages, guarantors, a bunch of certificates that need to be obtained, make these services inaccessible to a whole category of people. Lending without intermediaries can be cheaper and more trustworthy. Instant deals, transparency, and security are what is lacking in this area.
- Trading. Cryptocurrency trading has remained popular for a long time already, and the world knows dozens of trading platforms with different listed currencies and trading instruments. Decentralized exchanges operate without the participation of the administration, which allows traders to enter into P2P relationships. Funds are not stored in the site's wallets, which is also of great importance for safety.
The DeFi market is developing rapidly and many projects with unique solutions appear. Let's consider some of them:
Curve allows users to trade between stablecoins with low slippage, low fee algorithm designed specifically for stablecoins. Curve is one of the early proponents of yield farming and currently offers 7 pools where users can stake stablecoins to earn rewards, such as new currencies.
With a simple interface, Curve is the popular DeFi platform for its user-friendly features and transparent documentation.
Emirex DeFi is the All-in-one platform that combines multiple DeFi solutions, including loans, borrowing, staking, decentralized exchange, insurance, and mining, and allows its users to profit from all these complex products in a simple and accessible way.
Emirex has the highest interest rates on the market with the most profitable annual income of 60.42%. It is an adaptive system with automated management based on a fully decentralized platform.
The decentralized Maker DAO credit platform supports DAI, a stablecoin whose value is pegged to USD and one of the most used stablecoins in the cryptocurrency industry. Maker DAO allows anyone to open a vault, lock in crypto collateral, and generate DAI against that collateral.
The development of decentralized finance deprives banks of the prerogative to create and control assets. Decentralized finance takes familiar banking products and makes them freer. DeFi is developing the advantages of cryptocurrencies and offering new tools for self-regulation of the financial market, which blurs the boundaries between financial market participants. The issuer and seller of a decentralized financial asset is a technology entrepreneur, not a bank. Under these conditions, the host country of the parties to the transaction and local regulation no longer matters.