Decentralized finance, or “DeFi” for short, has taken over the world of crypto and blockchain. However, its recent renaissance masks its roots in the bubble era of 2017. While everyone and their dog were doing the “Initial Coin Offer” or ICO, few saw the potential of the blockchain far beyond the rapid rise in value. These pioneers envisioned a world in which financial supplements from trade to savings, banking and insurance would be possible just on the blockchain without intermediaries.
To understand the potential of this revolution, imagine if you had access to a savings account that gives 10% in dollars a year, but without a bank and virtually risk-free funds. Imagine you can sell crop insurance to a farmer in Ghana who sits in your office in Tokyo. Imagine being able to be a marketer and earn a percentage of the fees that each Citadel would like. Sounds too good to be true? This is not the case. This future is already here.
DeFi building blocks
There are a few basic DeFi building blocks that you need to know before moving forward:
Automated manufacture or exchange of one asset for another without trust without an intermediary and clearing house.
Lending with excessive collateral or the ability to “use your assets” for traders, speculators and long-term owners.
Stablecoil or algorithmic assets that track the price of the underlying balance without centralization or provisioning with physical assets.
Understanding how DeFi is done
Machine guns are often used in DeFi because they mimic traditional fiat currencies such as USD. This is an important event because the history of the crypt shows how changeable things are. Staibcoins, such as DAI, are designed to track the value of the USD with small deviations even during strong bear markets, that is, even if the value of the crypt collapses like the bear market of 2018-2020.
Lending protocols are an interesting development that is usually built on the basis of stable coins. Imagine if you could close your assets for a million dollars and then borrow from them in stable coins. The protocol will automatically sell your assets if you do not repay the loan, if your collateral is no longer enough.
Automated market makers form the basis of the entire DeFi ecosystem. Without this you are stuck with the old financial system where you need to trust your broker, clearing exchange or exchange. Automated market makers, or AMM for short, allow you to trade one asset for another based on the reserve of both assets in its pools. Price detection occurs through external arbitrators. Liquidity is pooled based on other people’s assets and they gain access to trading fees.
You can now get a wide range of assets in the Ethereum ecosystem, without having to interact with the traditional financial world. You can make money by borrowing assets or being a market maker.
For developing countries, this is a surprising innovation, as they now have access to a full set of financial systems in the developed world without barriers to entry.