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Decentralized Finance (DeFi)

September 23, 2021
min. read

Decentralized finance (DeFi) has been created as an alternative to traditional centralized banking and other services to make access to finance more convenient, easier, and possible for everyone. In addition, the profitability on such platforms is higher, while the fees are lower, which allows anyone to invest in any cryptocurrency.

📍DAO Masters is one of the first DeFi services launched in 2017. It allows loans in Dai stablecoin secured by the Ethereum cryptocurrency.

Most DeFi applications are built on the Ethereum blockchain, and alternatives are HECO, Cardano, Polygon, Tron, Polkadot, and others. The main problem of the Ethereum network is low bandwidth along with high transaction fees.

💥Decentralized finance covers 12 areas with different market shares:

  • prediction markets — 2%
  • decentralized autonomous organizations — 4,8%
  • lending — 10,2%
  • asset management — 18,7%
  • derivatives- 6,6%
  • insurance- 1,8%
  • exchanges and liquidity providers — 22,3
  • stablecoins — 10,8%
  • banking and payments — 7,2%
  • infrastructure — 9%
  • marketplaces — 2,4%
  • bitcoins tokenisation — 4,2%.

💎Advantages of DeFi:

  • anyone can get one or another financial service avoiding a bank
  • the user can carry out any transaction at any time, 24/7
  • ease of creating and launching digital assets on the market and raising investments in such a way
  • fast payment processing
  • the opportunity to invest and receive income
  • ease of building applications for developers
  • undisputed control over assets
  • a more robust and less vulnerable system due to the lack of centralized management
  • users have access to the service code, which ensures transparency of work and trusting cooperation
  • no geographic restrictions, even if the user is a citizen of a country under sanctions, one still may reach decentralized finance.

🔥🔥Smart contracts play an essential role in decentralized finance. Smart contracts are digital protocols for transferring information. They use mathematical algorithms to execute a transaction once conditions are met automatically and fully control the process. Put simply, it is a computer code alternative to a formal legal agreement.

The smart contract terms are maintained by a computer code, ensuring automation and transaction reliability.

🚀Benefits of smart contracts:

🟣independence — no need to look for a specialist to perform the transaction

🟣safety — the contract is stored in a distributed ledger

🟣reliability — documents are duplicated in the blockchain many times

🟣savings — no need to pay for intermediaries

🟣accuracy — no need to enter data by hand.

⭕Along with all the advantages we listed above, the decentralized finance market also has disadvantages:

🔺high risk of user error — responsibility passed from the intermediary to the user so that user error can lead to big problems

🔺lack of user experience — after all, DeFi isn’t for everyone. Using DeFi apps requires a lot of effort on the part of the user and explaining why it is better than traditional centralized solutions.

DeFi sector features a kind of reward for active users, called yield farming.

Profitable farming is an investment strategy in the decentralized finance market, where the user earn crypto rewards in the project`s native tokens for providing liquidity to decentralized exchanges.

🥇The DeFi sector uses the metrics of traditional finance. Talking about investments, the annual percentage rate (APR) and the annual percentage yield (APY). However, due to the high volatility in the market, these metrics are quite unstable and are better used in the categories of weeks or days, but not years.

Services to track the performance of the DeFi sector:

🔹 — the amount of funds locked in DeFi protocols.

🔹 — market capitalization of DeFi protocol tokens.

🔹 — interest rates in DeFi protocols.

🔹 — DeFi-protocols risk assessment.

🔹 — information on decentralized applications.

Users have digital wallets for funds storage. They are of two types:

🟢custodial — wallets where third parties store and manage the user’s assets on the user’s behalf

🟢non-custodial — wallets where the user fully owns and controls one`s assets.

We recommend using the Metamask wallet, working as a mobile application and extension in the browser. Most DeFi applications can be accessed via Metamask.

📌If you work with several DeFi applications, then you will need a crypto dashboard for convenience. Dashboard is a platform that brings all your DeFi activities together in one place and visualizes your assets. Examples of cryptocurrency dashboards: Frontier, InstaDApp, MyDeFi, and Zerion.

One of the most famous examples of a DeFi service is the Uniswap decentralized exchange. The DeFi exchange is built on the Ethereum blockchain and provides opportunities for developers, liquidity providers, and traders to participate in an open and accessible financial market. The market capitalization of the UNI exchange token is $15268451837.

✨🔥Minto is another example of a DeFi project. The platform runs on the HECO blockchain and allows everyone to earn on Bitcoin mining by buying BTCMT tokens. Token holders receive rewards, trade, and raise capital.

Decentralized finance is a breakthrough for the financial sector, improving the quality of life of people already now.

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