The DeFi market capitalization stands at $119 billion at the time of writing, according to CoinGecko.
The increase in interest is due to many factors; 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. You can request a loan and get approved instantly through a lending DeFi app while you are on a bus ride anywhere in the world. Your online movements will be protected and secured by the protocols and smart contracts on the blockchain. There are several DeFi platforms that cater to various financial related services without the need for middlemen, banks or brokers. Let’s explore a few of them.
What is DeFi?
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 its trusted Smart Contracts to carry agreements and transactions via dApps (Decentralized Applications).
Lending & Earning
Traditionally, only the banking system and bankers would allow you to earn interest from your saved funds with interest rates ranging between 0.1% to 5%. Similarly, only banks and bankers can approve loans with several terms and conditions in place and interest rates ranging 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.
Investors 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 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. They can loan their cryptos out and generate an income. 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 ID to procure a loan, which is how 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. There is no ledger on the blockchain which leads to weak security of information and funds. As we move towards a trustless economy without the need for third parties to exchange goods, DEX enables users to remain in control of their funds by operating all transactions and storage functions on the blockchain. This ensures 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 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 from user B, user B then approves the request in a single click and User A 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 have lower 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 and no restrictions. Data is distributed across the network instead of storing it in a central database.
OpenBazaar, a DeFi marketplace is 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 users can sell and buy a variety of offerings, including music, games, art, clothes, electronics, local food and beverages. Transactions are completed 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 become the norm in the near future.
DeFi has opened the doors for many industries such as infrastructure and dev tooling, asset management, KYC and identity, margin trading, prediction markets, derivatives, insurance, tokenization and 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 bring interesting solutions 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.