Are you aware of the growing development of cryptocurrency, which allows you to borrow, lend or get insurance in a decentralized way in a few minutes?
For years, defi (or decentralized Finance) has been one of the hottest topics in the cryptocurrency industry.
This is not surprising. Defi constitutes a powerful concept that can achieve or even surpass bitcoin’s original goals. That is, to create a decentralized peer-to-peer (P2P) payment system.
The total market value of the decentralized financial industry is US $1.11 billion, which is developing rapidly. Since January 1, 2018, the defi market has surged by more than 2160%.
But what is defi? How can it develop so fast?
These issues are very important for cryptocurrency investors, because many of the tokens listed on AAX have gained a lot of value and utility from the development of this field.
What is defi?
Defi is a movement that includes a collection of financial services (e.g., trading, borrowing, lending, payment). These services operate in the form of blockchain networks and smart contracts using a decentralized infrastructure.
The traditional payment industry is essentially centralized, which often leads to low efficiency of products and services, and it needs a certain degree of trust in such central institutions, which can be said to be unreasonable.
Consider this: to apply for a loan, you must go to the bank and provide some documents.
Then you have to wait for weeks until the financial institution reviews your documents and decides the fate of the loan application.
Defi, on the other hand, provides global access for anyone in the world, using decentralized alternatives to traditional financial services such as trading, insurance, savings and loans.
To access these services, you don’t have to submit documents or wait a few days for the service provider to view your loan application.
Instead, you just need a smartphone or desktop device with an active internet connection. Just open the app and specify the funds you want to borrow, and the service will automatically pair you with the lender who lent you the money.
What is the core function of the defi DAPP?
We have created a table for you to explain the main functions of the defi distributed applications (dapps) and the main differences from traditional financial services.
What services does defi DAPP provide?
In this section, we will explore the most common products and services in the field of decentralized finance.
Currently, lending products are the most popular applications in the defi market.
The two largest defi dapps (by market value) – makerdao and compound Finance – have a total market share of 77.5%.
These platforms allow people to borrow money by using their cryptocurrency as collateral or earn interest by lending their digital assets to other users.
Top platforms such as maker and compound have the functions of other products (such as stable currency) in their DAPP, and can access other WiFi services.
Examples of borrowing and borrowing defi products:
· makerdao: a decentralized credit platform
Compound Finance: an algorithmic money market protocol
Instadapp: an intuitive interface on top of makerdao to help users who lack the necessary technical and financial experience
2. Decentralized exchange (DEX)
Decentralized exchanges or DEX are designed to operate the services of a centralized exchange through the use of smart contracts without the need to manage user funds.
Since smart contracts automatically match buyers and sellers, the advantage of decentralized transactions is that users can eliminate intermediaries.
However, the disadvantage of these defi services is that their popularity is limited, because most encrypted users are using centralized services (with better interface, faster transaction speed and higher liquidity) to trade their assets.
Examples of decentralized Trading:
IDEX: DEX with real-time token exchange function
Bancor: a decentralized liquidity platform
Atomex: multi currency wallet with built-in atom exchange
When someone uses the insurance service, the provider guarantees to compensate the customer for different events (such as death, loss, damage and illness) in exchange for the insurance premium.
In the field of defi, the service host is usually the DAPP community itself, which is characterized by insurance products with decentralized protocols to provide power supply for the blockchain.
For example, etherisc, the insurance platform established by Ethereum, has a variety of distributed, community built insurance products (such as Hurricane protection and flight delay insurance) that users can purchase.
An example of a defi insurance service:
· etherisc: distributed insurance protocol with community built risk transfer solution
Nexus mutual: a service to protect users from risks and errors in smart contract code
Vouchforme: a blockchain service where users can save money by sharing risks
4. Setting out
The blockchain network using the consensus algorithm of proof of interest (POS) requires the verifier to bet a part of its cryptocurrency capital to create, propose and vote in the network.
In exchange for maintaining the network, the POS verifier can obtain rewards by mortgaging its digital assets.
To support the consensus algorithm and generate passive revenue (similar to a bank’s savings account), developers created a defi DAPP in which they can use decentralized products, such as lofting pools and “service as you go” solutions.
Example of defi lofting application:
· stakewithus: as a service of POS protocol
Myth: verifier service for cosmos and loom networks
Dokia capital: a professional agency mortgage service
5. Payment service
Distributed payment service is usually a good choice for non bank accounts, encryption enthusiasts and even financial institutions.
Example of defi payment service:
Whisp: decentralized wage accounting solution with encrypted payment function
Lightning network: a network based on bitcoin, with smart contract and low-cost and fast off chain payment function
Request network: a decentralized network that allows users to request, verify, and execute payments
What is the top blockchain platform of defi?
Defi products need blockchain to run. Most of them use platforms such as Ethereum and EOS, and support both smart contracts and dapps.
However, bitcoin is also a popular choice for defi developers, because lightning network (a layer 2 scalable solution for cryptocurrency that supports fast and low-cost delinking transactions) allows the creation and operation of dapps and smart contracts on the platform.
1. Ethereum: the blockchain with the second largest cryptocurrency (ETH), many dapps and millions of smart contracts is the most popular platform for defi, with about 200 projects built on top of Ethereum network.
2. Bitcoin: with the implementation of lightning network, bitcoin has become the second largest defi blockchain, supporting 24 distributed financial applications.
3. EOS: EOS, the main competitor of Ethereum, lags behind bitcoin and becomes the third popular blockchain hosting 21 defi applications.
Defi: encryption is more than just payment and “hosting”
With its growing market share, defi enables users to access traditional financial products globally without the supervision of intermediaries and central institutions, such as service providers.
Therefore, defi is the proof in real life that cryptocurrency is not only a digital asset, but also used to promote decentralized (P2P) payment or speculation.
With the rise of defi, blockchain technology and cryptocurrency seem to be striving to achieve the original goals set by bitcoin founder Satoshi Nakamoto, which will promote financial inclusion, freedom and real ownership for all.
Responsible editor; zl