DeFi is financial instruments in the form of services and applications built on the blockchain. The main task of decentralized finance is to become an alternative to the banking sector and replace the traditional technologies of the current financial system with open source protocols. That is, open access to decentralized lending and new investment platforms for a large number of people. And allow them to receive passive income from cryptocurrency assets, as well as save on fees for transfers, loans and deposits.
In simple terms, this is a kind of alternative banking sector, the services of which can be used by people who do not want / do not have the opportunity to deal with traditional financial institutions.
HOW DEFI WORK
How DeFi works (on the example of projects that are used for loans in cryptocurrency). What should be done:
1. Find out the exchange rate of the desired token for a collateralized coin (in most cases, this is Ethereum).
2. Make a security deposit.
3. Get DeFi tokens that can be exchanged for fiat.
4. Return the taken amount of DeFi tokens, which will then be burned by the algorithm.
5. Collateral coins are returned to the wallet.
How this works is easiest to explain using the example of the MakerDAO platform, which accounts for $ 2.18 billion in investments in the sector.
MakerDAO is a lending platform that allows you to get loans secured by Ethereum. The procedure is simple:
1. The user must indicate how much Ethereum is ready to give on bail and can see how much DAI (stablecoin of the MakerDAO platform) he will receive on credit.
2. After making a deposit from the connected wallet, the user will be transferred DAI, which can then be withdrawn to fiat.
3. After the debtor returns the DAI, the token is burned and the Ethereum is returned back to the wallet.
You just need to take into account that ETH will have to be pledged 50% more than the loan amount.
For example, if you transfer 3 ETH to MakerDAO, you will only receive 2 ETH in dollar terms. The percentage ratio between the collateral and the loan, as well as the interest rate, is set by a general vote by the holders of the MKR platform utility tokens.
No credit histories, passports or income certificates - you can take out a loan in a few minutes if you have an ETH wallet. Sounds like an ad for a quick loan service, only on MakerDAO the loan interest rate is less than 1% (compare this with what your bank offers).
HOW TO EARN IN DEFI
The main ways to invest in DeFi can be summarized as follows:
1. Trading commissions
The investor places liquidity (cryptocurrency) on a decentralized crypto exchange and receives a share of the commission from trade transactions. The commission is usually 0.25-0.30% and is divided among liquidity providers according to their share in the pool.
The more actively trading is, the more commission income the protocol receives and the higher the profitability, but in many pools it can turn out to be negative.
2. Crypto-lending (issuance of loans)
The investor deposits liquidity in the lending protocol pool and these funds are issued as loans. This service is popular primarily among leverage traders who do not want to borrow funds from a centralized crypto exchange. The borrower must post a collateral in excess of 100% of the loan amount (sometimes 150% and even 200%); in case of non-payment of the debt, this collateral is automatically liquidated (sold), so that the creditor gets his money back anyway.
The yield depends on the currency of the loan and is constantly changing.
3. Profitable farming or liquidity mining This is the most complex, but also the most popular tool used by projects to popularize their tokens. The standard scheme is as follows:
an investor buys a token and places it in the liquidity pool of a trading or lending protocol - most often Uniswap;
as confirmation of participation in the pool, the investor receives special LP-tokens;
LP tokens are deposited (staked) on a special smart contract.
The investor receives regular payments in project tokens. We can say that he "plants" LP, and new free tokens "grow" from them - hence the term "farming".
Once launched, projects often pay large farm bonuses so that nominal returns can be as high as 1000%. Gradually, the number of tokens distributed every week decreases, but the yield still remains at the level of 50-100%. It must be remembered that this profit is nominal, and the real income will depend on the price of the token.
ADVANTAGES AND DISADVANTAGES OF DEFI
DeFi is a relatively new and as yet not well-established area in cryptocurrency infrastructure and many points require improvement. Because of this, it is difficult at this stage to single out all the pros and cons of DeFi. However, even now we can say for sure about some points.
Advantages:
Decentralization - we have already noted above that this property of DeFi is relative and not all projects are truly decentralized. However, it is in the nature of this technology that all processes are controlled not from one node, but from many computers that belong to different participants.
Lack of human factor - DeFi is fully managed by smart contracts, which excludes negative human impact. Any changes to the protocol are made only by the results of voting. The system, managed by smart contracts, operates according to clear rules that are the same for all participants.
Transparency - DeFi projects are open source, so information about transactions and other activities is available at any time. Also, if the project lacks functionality to solve a specific task, anyone can modify it to suit their requirements. Plus, thanks to open source, DeFi projects are available for fair audit.
Inclusiveness - everyone has the opportunity to create a DeFi service, in contrast to the traditional financial service, where it is necessary to obtain permits and report to regulators.
Cross-border - Through DeFi, everyone can get financial services due to the absence of intermediaries. For example, you can get a loan, regardless of the credit history and the subjective decision of the bank.
Disadvantages:
Low Funding - Compared to the traditional financial sector, DeFi has very little funding. For example, you can borrow much smaller amounts than in a regular bank.
High asset volatility - due to the hype around DeFi, the tokens of many projects are very volatile, which poses a threat of collapse of the entire system of a particular project. If, for example, the price of an asset falls sharply, then the assets are liquidated. To solve this problem, DeFi crypto lending services create excess coins, which is one of the main reasons for the low asset price.
Centralized oracles (data sources) - Most DeFi protocols take data from oracles controlled by a single team. Therefore, if the oracle falls into the hands of intruders, then the entire operation of the DeFi service will be disrupted.
The lack of real demand for DeFi services - the "boom" around decentralized finance is explained not by the demand for services, but by the desire of users to make money on profitable farming. Because of this, the price of most DeFi tokens is “inflated”, which sooner or later may end up with a “bursting bubble”.
Which is better - a centralized or decentralized financial system. What problems does DeFi solve? Does DeFi have a chance to change for the better or completely replace traditional finance? You will find the answers to these questions in this video.
1.Introduction / 2.Fintech revolution / 3.Disadvantages of the traditional financial system / 4.Effectiveness of DeFi / 5.Key indicators of the growth of the DeFi market / 6.How the problems of the traditional financial system are solved in DeFi. GameStop Case / 7: How DeFi Solves the Problems of the Traditional Financial System. Bets, commissions, accounting, access to services / 8. Disadvantages of DeFi / 9. The future of DeFi
USEFUL DEFI SERVICES
defipulse.com - the volume of assets locked in DeFi protocols;
defimarketcap.io - DeFi token market capitalization;
defiprime.com - interest rates for DeFi projects;
defiscore.io - risk assessment when investing in DeFi projects;
dappradar.com - information about decentralized applications;
defirate.com/ - Ranked DeFi projects, breaking news and case studies.