Our DeFi experts demystify and explain decentralized finance, how it works, and how to capitalize on its growth potential.
What Is TradFi
TradFi, short for traditional finance, refers to the mainstream financial system that consists of retail banks, commercial banks, investment banks, other financial institutions, and fintech companies. A few popular examples of TradFi institutions are Goldman Sachs, JP Morgan, Morgan Stanley, Bank of America, PayPal, and Wise. They are mostly brick-and-mortar organizations that offer banking and financial services which have been around for years. Although most TradFi providers have digitized their operations and services, they are characterized by a high degree of centralization, government regulations, compliance, KYC, and high barriers to entry. As a new wave of non-traditional finance emerges, it’s important to define TradFi and understand how it stands apart. How Is TradFi Regulated? TradFi is regulated by the government and the central bank in most countries. TradFi institutions have to comply with the rules and regulations mandated by the authorities. Depending on the sector and scale of business, the tax requirements vary. It is also mandatory for TradFi institutions to submit audit reports annually. While the red tape is often too stringent for new players to enter, it is also efficient in nurturing the growth of the economy in the desired course. This is given that the policymakers know what they’re doing. For example, the government wants to empower women in rural areas. As a means, the central bank can ask banks to offer loans to rural women at low-interest rates. The regulations help curb money laundering, corruption, and terrorism, among other illicit activities. How TradFi compares to other Finance DeFi vs. TradFi DeFi (decentralized finance) refers to the peer-to-peer financial infrastructure built on blockchains. DeFi uses a distributed ledger system to verify and authorize transactions, removing middlemen like banks and governments from the picture. Let’s take a quick look at the key differences between the two: In DeFi, a blockchain protocol or a community issues money. In TradFi, the central bank issues money.In DeFi, smart contracts authorize the transaction of money between two parties. In TradFi, banks facilitate the transactions. Anybody can give/get DeFi loans as long as they fulfill the collateralization requirements. Banks offer traditional sources of finance after checking the applicant’s financial statements and credit score. You can start investing on DeFi platforms in a few steps. With digitization, TradFi investing has opened up to a large section of people as well. But it still requires KYC and documentation. CeFi vs. TradFi CeFi (centralized finance) merges the yield benefits of DeFi with the user experience and security of TradFi. It offers opportunities to invest in cryptocurrencies and digital assets using crypto-based accounts that are similar to traditional savings accounts. However, the APYs vary significantly. On CeFi platforms, you can borrow money against your crypto holdings, just like how you would avail a collateral-backed loan from a bank. Unlike TradFi, this requires little to no paperwork. While TradFi deposits are sometimes eligible for government-backed insurance, that is not the case with CeFi deposits. Being a relatively new sector, it is riskier. Traditional Finance vs. Behavioral Finance Behavioral finance studies the psychological influences and biases behind the behavior of investors, financial practitioners, and other market participants. Traditional Finance and Entrepreneurial Finance Entrepreneurial finance consists of the resource allocation for new ventures, addressing some of the key challenges faced by entrepreneurs like fundraising and valuation. What Role Does TradFi Have In Cryptocurrency? Industries have to keep pace with the latest technology to prove themselves relevant in the long run. Blockchain and cryptocurrencies mark today’s biggest financial revolution. TradFi organizations and platforms, including banks, will have no choice but to adopt cryptocurrencies eventually, bringing them to the mainstream. Since TradFi is under the watch of the government, this will pave the way for the positive regulation of the crypto industry. In key sectors like insurance and lending, they can work together, blending innovation, accountability, and speed. Benefits of TradFi Only businesses with licenses and accreditation can provide TradFi services. In the event they lapse, customers can raise complaints and get compensation. The red tape makes it difficult for scammers and fraudulent participants to get in. TradFi cooperates with the government to track illegal spending and investments. In DeFi, this will be hard as transactions are anonymous. Governments can implement developmental policies by joining hands with TradFi institutions. TradFi has its set of limitations. The excess regulations and government intervention hamper growth and innovation in the industry. It also prevents a large section of people from accessing financial services. In the coming years, TradFi, blockchain technology, and cryptocurrencies will hopefully find a common ground to build an advanced financial infrastructure feasible for all.
Decentralized financeDeFi Loans Explained for BeginnersDeFi, an acronym for "decentralized finance," is an open-source blockchain-based financial application that enables users to manage and trade assets without third-party intermediaries. DeFi encourages transparent, permissionless, and trustless transactions across the financial services ecosystem. Investors receive high returns in the form of rewards from lending crypto assets to borrowers, participating in yield farming, or staking. What Is DeFi Lending? DeFi lending is a fast-growing multi-chain lending service that allows users to enlist their cryptocurrencies on a DeFi platform for lending. Borrowers access the DeFi platform and obtain direct loans via a peer-to-peer process (absent of any intermediaries), while lenders on the platform earn juicy interests on their loans. The high-interest rates available on DeFi platforms play an incentivizing role and encourage lenders to lock up their assets on these platforms. DeFi interest rates are usually higher than lending rates in traditional finance alternatives. Some of the biggest DeFi lending protocols include Maker, Aave, and Compound. Together these protocols hold around $9 billion in market capitalization. How Do DeFi Loans Work? Save for value appreciation; idle crypto-assets do not earn interest. DeFi loans provide an earning mechanism for crypto assets by connecting borrowers and lenders and implementing interest rates that encourage lending. A lender provides loans to a borrower, who will then pay returns on the investment with interest on top of the initial amount invested. Using this approach, DeFi protocols provide lending services for individuals in the same vein as traditional lending through banks. However, the difference is that DeFi loans are decentralized and absent intermediaries or restrictions. With DeFi, anybody can access the system and become a lender. A four-step process kickstarts the business of DeFi loaning: Borrowers on the platform deposit collateralThe platform pays out loans via smart contractsBorrowers pay interest for borrowing cryptosPaid interest goes to the platform's lenders For many DeFi protocols, obtaining loans may require the borrower to provide collateral, but this isn't always the case. Some DeFi platforms seek to push the idea of decentralization further and expand their reach to borrowers by creating uncollateralized loan options. How Do You Loan Crypto? In every DeFi protocol, the lending process involves two participants; lenders and borrowers. For Lenders Lenders need a crypto wallet. A crypto wallet allows lenders to fund accounts on the go and grant access to liquidity for borrowers. For Borrowers While lenders provide the much-needed liquidity pool, borrowers are the group that approaches such pools for access to loans. To request a crypto loan, the borrower stakes a certain amount of collateral. The collateral must be equal to or more than the loan request. If borrowers pay off the loan successfully, they will automatically receive the collateral deposited. It is important to note that DeFi lending platforms usually draw up their preferred lending tokens rate. The rates aren't consistent and depend on the protocol. For example, DeFi interest rates for crypto coins start from 3% to 8%, whereas for stablecoins, the rate varies from 10% to 18%. These rates are open to the public and help inform lenders' strategies. What Should Beginners Be Aware of With DeFi Loaning? Participating in lending protocols is easy, but there are some crucial things to be aware of as a beginner. Users must be careful of committing to early-stage projects and untested DeFi lending protocols to avoid scams. Since lending rates vary with each protocol, checking and comparing lending rates on different DeFi protocols before committing to any of them is important.Reduce the chance of falling victim to malicious attacks or rug pulls by properly researching protocols, verifying their team's credibility, and ensuring their code is audited by a third party.Borrowers must be aware that the volatile crypto market can cause under-collateralization, which occurs when the collateral a borrower puts in drastically reduces in value compared to the loan request. Are DeFi Loans Worth It? DeFi comes with interesting perks for its users. These merits are currently unavailable in traditional finance. Its unique advantages cut across all participants, lenders, and borrowers alike. Margin trading options present higher interest rate earnings for long-term lenders. At the same time, borrowers from all over can partake in a censorship-free financial environment without fear of exclusion based on status or partiality. Leveraging blockchain technology, DeFi loans offer an improved and truly decentralized method of conducting the age-old financial service of lending by eliminating the need for third parties. However, DeFi lending still comes with certain risks. There is the possibility of rug pull schemes, protocol code vulnerabilities, flash loan attacks, liquidations, impermanent loss, and regulatory uncertainty. Regardless, the technology behind DeFi is still nascent. Further evolution of blockchain technology could create solutions that eliminate the current issues plaguing the DeFi space.
Decentralized financeTradFi vs DeFi: Differences and SimilaritiesDecentralized finance (DeFi) is an umbrella term used to describe financial services based on blockchain technology that seeks to provide users with open, fair, and transparent financial services while eliminating intermediaries. DeFi removes the control that centralized institutions like banks and governments have over finance services. These entities usually complicate transactions, leaving users with little control over their funds. TradFi, or traditional finance, refers to mainstream financial services and the institutions that run these services like commercial banks, investment banks, and Fintech companies. TradFi is centralized and regulated by government agencies. TradFi services adhere to strict Know Your Customer (KYC) and Anti Money Laundering (AML) rules and exclude retail investors from many financial services accessible through DeFi. Key Takeaways Decentralized finance (DeFi) describes blockchain-powered financial services that are open to all without the influence of intermediaries.TradFi refers to mainstream financial services characterized by centralization and regulation.TradFi and DeFi offer similar financial services but differ in terms of mode of operation, accessibility, and regulation status. TradFi and DeFi both use fintech to finalize transactions and provide similar services to consumers.TradFi and DeFi have found ways to operate in symbiosis via protocol-app integration despite their fundamental differences. Main Differences Between TradFi and DeFi TradFi and DeFi systems deliver the bulk of financial services today and provide similar offerings for their users. However, there are some key differences in their mode of operation. Centralization DeFi services are decentralized and trustless, thanks to blockchain technology and smart contract integration. With DeFi, smart contracts replace the middlemen, and users trust the public blockchain to execute the services promised by the protocol. Unlike DeFi, TradFi embraces centralization by relying on governing bodies and regulators to provide a system of trust. This approach to finance comes with the drawbacks of financial exclusion and overhanded regulation, which may hinder innovation. Accessibility The heavy-handed restrictions associated with TradFi have made it inaccessible to many individuals, now referred to as the 'unbanked' population. The high barrier to entry limits the number of people that can partake in traditional finance services. DeFi is open and transparent without the barriers to entry present in TradFi since there are no centralized entities governing it. The far-reaching capabilities of the technology promote financial inclusion, allowing anybody to partake in the system. Regulation TradFi systems are heavily regulated with different requirements necessary for participation. The centralized governing bodies that oversee TradFi may require users to provide authorization from regulators and official licenses, or complete KYC or AML procedures. DeFi does not rely on a central regulatory body to ensure trading and asset exchange. Therefore, transactions are seamless and hassle-free. A DeFi platform gives traders control over their assets and wallets. Provided you have a wallet; anyone can use DeFi. However, lack of regulation and anonymity exposes DeFi to the influence of bad actors like rug pull scammers and hackers. Other differences lie in both systems' yield rates, profitability, and service offerings. DeFi generally offers higher yields than traditional systems and certain unique financial services like yield farming and staking. Similarities Between TradFi and DeFi DeFi's entry into the financial landscape primarily revolves around providing a viable solution to the TradFi legacy system and its restrictions. However, despite having different operating mechanisms, both finance concepts still have certain similarities. Technologically Backed Transactions Both TradFi and DeFi systems leverage technology to facilitate transactions. DeFi uses blockchain solutions like Ethereum, Solana, or Cardano to power its services and protocols; TradFi also depends on messaging networks like SWIFT to transmit information about financial transactions on a global scale. Common Financial Service Offerings Another converging point for TradFi and DeFi is in the broad range of financial services that both offer. Although there are some products that are unique to DeFi only, users of both systems can access similar financial services like lending, borrowing, margin trading, payments, and spot trading. Integrated Payment Solutions TradFi and DeFi systems offer clients integrated payment solutions with automated payment services. However, TradFi currently provides the bulk of these services, but DeFi solutions like Wyre and DePay are catching up. Could DeFi Become the Future of Finance? With the merits it brings to the table and its tremendous growth, some experts think that DeFi may replace TradFi systems in the future. For this to happen, DeFi-related problems like scalability, liquidity, security, and lack of regulation must be resolved before its services can go mainstream. However, while DeFi and TradFi are fundamentally different, current trends indicate that these two systems can work together. Traditional banks have begun to recognize the potential of DeFi. Some are working on crypto-related services for clients, while others are building integrations that allow consumers to use DeFi protocols within TradFi applications. This growing symbiosis between TradFi and DeFi breeds innovation and could open the door for the mainstream use of cryptocurrencies.
DaosAdvantages and Disadvantages of DAOsDAO is an acronym that stands for decentralized autonomous organization. Namely, this refers to an organization that is run by code only and doesn’t effectively rely on a central authority to control it. Instead, it relies on smart contracts which are pieces of software code stored on the blockchain. With enough knowledge of programming, you can use smart contracts to create programs for just about anything, even complicated tasks. In DAOs, the smart contracts are used to eliminate the third parties between 2 traders and keep the transaction honest & transparent. Only when the terms of the smart contract are met, the transaction will run and keep things fair. This is how an organization that relies on smart contracts gets the qualities of being decentralized and autonomous. Moreover, DAOs do not have a board of executives or CEOs to decide and implement any changes in the policies of the organization - instead, every shareholder in a DAO has tokens that can be used to vote on potential upgrades and updates. If a decision gets the vote it is implemented into the code and the changes in the organization take place immediately for everyone. This is how DAOs can constantly make changes to improve and evolve to meet the demands of the future. Advantages of a DAO Decentralized Most traditional businesses usually have a small group of people or in some cases a single owner that makes every decision for it. DAOs, however, rely on the votes of every single shareholder to make decisions, which makes them focused on community, rather than entirely on profit. Automated Most of the menial and repetitive tasks that traditional businesses have to go through like processing applications are automated in a DAO system. This makes it more efficient in terms of time and finance compared to centralized organizations. Transparent Because the DAO blockchain keeps records of every single transaction done with a protocol + smart contracts, DAOs are completely transparent. Every user has the access to see the records at any time, unlike in traditional businesses & organizations. Open-source DAOs are open-source, which means that their code is out in the open for everyone to see. This is a big advantage because it gives other developers the possibility to engage with it and create new features and addons for it. Everlasting In contrast to centralized businesses, DAOs cannot be shut down by any government bodies or organizations - or any central authority for that matter. They are not entitled to provide any information to central authorities and the only way for it to shut down is if the decision gets enough votes from its shareholders. DAOs are regarded as being timeless, as there will always exist proof on the blockchain that a transaction was performed thanks to an immutable time mark. Disadvantages of a DAO Open-Source Vulnerabilities Besides its benefits, open-source code can raise some security difficulties as well. Because it is available for everyone, this means that it is available to potential hackers as well. They are able to "reverse engineer" the code in order to find vulnerabilities in it, leading to hacking and security failures. A good example of this is the attack on The DAO which led to its premature failure. Hackers were able to exploit errors in the code and steal $50 million worth of Ethereum from it. Token Accumulation Even though DAOs try to include every shareholder in the decision-making processes and make them equal, this area is not perfect yet. Users that have accumulated a massive number of tokens can have a higher power in the voting process than the ones with significantly smaller amounts. Slow to React Voting on every decision might sound great in theory, but sometimes decisions need to be made fast. To counter a dire situation such as a security breach a fast reaction is needed, which can not be taken before voting takes place. Do DAOs Have a Future? The introduction of DAOs as a revolutionary concept is a promising attempt to overcome the shortcomings of traditional organizations and their method of working. While they have been successful in eliminating some of the issues, like the need for an intermediary, new problems seem to arise on the way. In addition to security concerns, there are liability and legal regulations that have not been set in place yet. Furthermore, opinions are split on how much good can come from organizations that encourage a move towards dehumanization. Some critics believe that there are management processes that can be properly done without a human touch, or at least not with the technology available today. In the end, a DAO can be only as good as the code that is running it, so most of the issues with them today can be solved with improvements to their code tomorrow. The way things seem at the moment, DAOs are not entirely ready to replace traditional businesses yet, but certainly have the potential to do so in the future. Through trial of error and many ups and downs, DAO enthusiasts have a chance to build the world of tomorrow and change the way we look at corporate organizations.
Decentralized financeAutomated Market Makers: What They Are and How They WorkAutomated Market Makers in crypto (AMMs) are the underlying smart contracts powering DeFi applications (dApps), like decentralized exchanges (DEXs). In simple terms, AMMs are self-governing trading techniques that eradicate the need for centralized marketplaces and related market-making methods. Basically, market makers are liquidity providers. In business, liquidity denotes how fast and efficient a given asset can be purchased or sold. Now that you know what AMMs are let’s discuss their role in detail. What Do Automated Market Makers Do? AMMs perform the same function as exchange order books – they are simply trading pairs. Nevertheless, you do not need another trader on the buyer side to fill your sell order. Rather, you interact with a computer program that performs the trade for you. On a DEX like Uniswap, trades occur directly between peer wallets. Suppose you sell BTC for USDT on a CEX like Coinbase, another person on the other side of the trade purchases BTC with USDT. This process literally resembles a Peer-to-Peer (P2P) transaction. Contrary, an AMM assumes a Peer-to-Contract (P2C) process. Here, there are no counterparties like in a CEX since trades occur between peers and smart contracts. Apart from lacking order books, AMMs also lack order types. The price you find for the token you plan to trade is established by formula instead. However, it’s good to note that some future AMM setups may offset the above statement. Though there are no counterparties in AMMs, someone needs to create a market by offering liquidity. This liquidity is held in protocols and is offered by liquidity providers (LPs). How Do Users Trade on Automated Market Makers? Here are two important points you should know before we proceed further: Trading pairs found on CEXs exist as exclusive liquidity pools in AMMs. Instead of applying dedicated market makers, individuals can offer liquidity to liquidity pools by locking tokens accepted in the pool. To maintain a 1:1 ratio of tokens in liquidity pools and avoid differences in the pricing of locked tokens, AMMs leverage predetermined algorithms. For instance, Uniswap and most DEXs apply a simply x*y = k formula for constant products and fair pricing. X is the value of token A, Y represents the value of token B, and K is the constant. Generally, Uniswap liquidity pools uphold a condition where the multiplication of the price of tokens A and B are equal or constant. To illustrate how AMMs work, let’s consider a BNB/BUSB liquidity pool as our example. When traders buy BNB, they add BUSD to the pool and extract BNB. Obviously, this reduces the amount of BNB in the pool, increasing the price of BNB and offsetting the balancing impact of the x*y = k equation. Contrary, since more BUSD has been injected into the pool, its price drops. When BUSD is bought, the reverse is true – the price of BNB drops in the pool while the price of BUSD increases. The Role of Liquidity Providers in AMMs As mentioned earlier, AMMs need liquidity to work effectively. Inadequately funded pools are vulnerable to price slippages. AMMs incentivize users to lock tokens in pools for other people to trade against these pooled funds to prevent slippages. Usually, the AMMs reward LPs with a portion of the transaction charges perfumed on the pool. For instance, if your deposit is equal to 20% of the pooled funds, you will be rewarded a liquidity pool token equivalent to 20% of the generated transaction charges of that pool. If you wish to leave the pool, you simply redeem your liquidity pool token and get your fair share of gas fees. Besides, most AMMs issue governance tokens to LPs and traders. As the name suggests, a governance token gives holders voting rights on matters relating to the governance and development of the AMM protocol. How Can You Become a Liquidity Provider? Any individual can become an LP by locking assets in a protocol and earning pool tokens. The pool tokens monitor the LP’s portion of pooled funds and can be exchanged for the underlying token any day. Apart from earning a portion of the transaction fees, LPs can earn bonuses through yield farming. Here, AMMs incentivize liquidity provision by offering coin rewards. To be eligible for yield farming, you must lock a certain amount of tokens into the pool. After confirming your contribution, the AMM protocol will automatically accumulate reward tokens, claimable regularly. The longer you offer liquidity, the more rewards you generate. However, this discussion about Automated Market Makers and Liquidity pools can’t be complete without mentioning the risks involved with liquidity pools. Let’s briefly look at an impermanent loss since it’s the major risk associated with liquidity pools. Impermanent Loss Impermanent loss occurs when the price ratio of the pooled assets drops after locking them in a protocol. The bigger the drop, the more significant the impermanent loss. For this reason, AMMs function well with coin pairs with similar values, like stablecoins and wrapped coins. Nevertheless, this phenomenon is impermanent since the price ratio is also likely to revert. It can only be termed permanent when you withdraw your tokens before the price ratio returns. Additionally, it is worth noting that the potential earnings from gas fees and yield farming can sometimes offset these losses. Bottom Line AMMs exploit the drawbacks of CEXs market making. The centralized approach is manual, making it a time-consuming activity for traders and makers alike. This new form of liquidity provision empowers the DeFi industry to be more effective and realize its full potential. As the DeFi landscape continues to grow, AMMs will undoubtedly play a significant role in its development. Currently, only a few businesses are offering new solutions using AMMs. However, the future is bright for AMMs protocols as they will find more applications across the DeFi industry.
Decentralized financeMakerDAO: The History and Role of the Building Block of DeFiMakerDAO is an open-source Decentralized Autonomous Organization (DAO) and financial lending and borrowing application on the Ethereum blockchain. The protocol is partly Governed by the Maker Foundation, although it is fast moving towards a self-governed system. Developers across the globe started working on the MakerDAO between 2014 and 2015 to build the initial version of its codebase and decentralized architecture. After two years of development, the Maker platform released its first documentation. The project was described as a system for creating the DAI stablecoin on the Ethereum blockchain using collateralized debt positions embedded in smart contracts. The project developers were a decentralized team of individuals and organizations that included developers from the Maker Foundation, partners of the foundation, and other entities. DAI, Maker’s stablecoin was initially a single collateral asset, SCD called Sai. It became protocol started supporting multiple collaterals with issued Dai backed according to their volatility of the collateral asset. The decision was reached through scientific voting, another feature of Maker that keeps the platform decentralized. What Is the Maker Protocol? The Maker protocol comprises two main assets and other ERC20 assets that serve as collateral on the MakerDAO platform. The first asset MKR is the governance token of Maker that can be used to vote on 1MKR:1 vote basis on changes to the protocol. The MKR token is also used to protect the system from arbitrary decisions that can affect the parameters set to ensure the sustainability of the MakerDAO protocol. As the governance token of MakerDAO, MKR ensures stability through decisions on adding collateral asset types and defining the parameters for this collateral. MKR holders decide on modifying and adding risk parameters for new collateral asset types. MKR is also crucial in modifying DAI savings rate, choosing oracle feeds, the trigger of emergency shutdowns to protect the system, and upgrading the system. The DAI stablecoin functions as an on-chain decentralized stable currency with the complete features of fiat money and can be owned through minting by locking collateral assets such as Ethereum in Maker Vaults within the protocol or by buying Dai from exchanges. Minted DAI was kept at a minimum of 150% collateral ratio, which meant that if you were to $500 worth of Dai, you would need to keep a minimum of $750 worth of ETH or other collateral in the vault. With the approval of the Multi Collateral Dai or MCD collateral contract in 2019, the minimum collateral ratio is now 175%. Minters of DAI through collateral vaults must pay a stability fee and the amount of Dai generated to liquidate their vault and reclaim their assets. There is also a 13% liquidation fee paid on liquidated vaults which the protocol keepers can initiate an auction mechanism to settle fees when the need arises fully. Maker was established to create a price-stable cryptocurrency that gets its backing on-chain from crypto assets instead of fiat or physical assets. Dai is a neutral collateral-backed cryptocurrency that is free from the volatility of Bitcoin. According to the protocol whitepaper, Dai serves to create leverage positions for traders who want to hold their collateral assets such as ETH and gain exposure to the same or other cryptocurrencies while remaining fully collateralized and retaining their original assets. Remittances can also be settled in a stable digital asset using Dai and charitable contributions that want to stay transparent using the advantages of blockchain technology. Dai can also be used to wager on the future prices of assets without exposure to the volatility of the original asset in prediction markets. As one of the first protocols to run reliable price-feed oracles on the Ethereum blockchain, Maker also hopes that its oracles will be used by future DeFi projects to ensure the security of their system. The stability mechanism of MakerDAO and the Dai stablecoin is pretty complex. Still, it is important to note that MKR also acts as a stability mechanism that keeps the peg of Dai as close as possible to the US dollar. The Dai Saving Rate (DSR) is the parameter that determines the amount earned in APY on Dai savings. MKR holders reduce the DSR, which is normally around 6% APY when the price of Dai moves above the peg. Doing this will reduce the supply of Dai by reducing the demand since users will be less interested in minting new Dai at such low yields. The demand for circulating Dai will push the price back to the peg. MKR holders also increase the DSR when the price of Dai falls below the peg, thus causing demand to put pressure on the price of Dai until it reaches the 1:1 peg with the dollar. Who Can Access DAI Stablecoin? Anyone can access Dai using Ethereum or other collateral ERC20 assets supported by the Maker protocol. These assets are used to create a collateralized debt position which is essentially a smart contract on the Ethereum blockchain that holds the collateral in a vault. Minting Dai simple even though the explanation sounds a bit technical. Dai can simply be minted on Oasis or other supported platforms decided by MakerDAO that forms the community ecosystem. It is also possible to own Dai by purchasing it on popular exchanges. The Founder of MakerDAO Rune Christensen, a Danish biochemist, and businessman, is the identifiable co-founder of MakerDAO. On Rune’s profile on the popular professional networking platform LinkedIn, Rune describes MakerDAO as the first stablecoin on the blockchain that eliminates volatility through a system of smart contracts. Rune owns two bachelor's degrees, one in Biochemistry specializing in complex chemical machines from the University of Copenhagen and another in International business from Copenhagen Business School. What Makes MakerDAO Special? Maker’s DAI is without doubt Ethereum’s native stablecoin even though there are now multiple stablecoins on the Ethereum blockchain today. It is the most widely used and longest-running protocol on the Ethereum blockchain. It is the 6th protocol by total value locked or TVL in the collateralized debt position, CDP category on the Ethereum blockchain with over $23 million in value. According to sources, Andreessen Horwitz, renowned venture capital, invested $15 million in Maker DAO to buy 6% of the total MKR supply as a part of its early investment through its a16z cryptocurrency fund. Created the core layer of DeFi MakerDAO laid the groundwork of ideas that led to creating several protocols on the Ethereum blockchain. The launch of DAOs like Curve, Uniswap, and other protocols that were based on collateralized lending, exchange, swapping, and the allocation of value on-chain attests to the groundbreaking work of MakerDAO in DeFi. Newer protocols, successful and unsuccessful on the Ethereum blockchain, have often cited MakerDAO for their careful economics and stabilization mechanism. Developments in algorithmic stablecoins are also offshoots of MakerDAO. The key mechanisms of DeFi as we know it today, including AMMs, vAMMs, and other smart contract-based models and stability mechanisms, are similar to the collateral debt mechanisms and other stability contracts on the Maker protocol. How DAI, ETH, and MKR Work Together Dai is the stablecoin created when collateral debt positions or vaults are opened on the Maker protocol. It offers users a stable asset while allowing them to lock volatile assets as collateral in the issuing vaults. Dai is also used to pay stability fees charged by MakerDAO. It is the primary asset of the protocol. To mint Dai, however, you must add ETH to the vault. Although the collateral has now been extended to include other ERC20 assets with varying liquidation parameters, ETH was the primary collateral asset and the reason for the name Sai which was initially the appellation for what is now known as the Dai stablecoin. MKR is the governance token and restabilization asset for the MakerDAO protocol. It triggers liquidation, suggests proposals, and protects the system from sudden events such as uncoordinated and abrupt liquidation which can endanger the protocol. You need ETH to get DAI and need MKR to sustain the setup that allows the creation of the crypto-collateralized stable asset.
Decentralized financeKey Features of DeFi ExplainedDecentralized finance, DeFi in short, is an umbrella term that captures all of the financial tools built on the blockchain. Namely, it is a fast-growing financial technology that aims to eliminate mediation and enable everyone connected to the internet to lend and borrow money easily. DeFi has the ability to take away control over money and financial services from banks. Without them acting as intermediaries, the financial market can reach a new level of openness and freedom. DeFi is based on four main pillars known as the DeFi layers: Settlement layer This acts as the anchor for the entire system and ensures the necessary security people are looking for in a decentralized system. Protocol layer In simple terms, this is a layer that provides the rules of the entire blockchain network. Application layer This layer comprises all of the blockchain-generated applications that users might use to trade, exchange, buy, sell, lend and even borrow assets. Aggregation layer This is the topmost layer where you can find the services that aggregate the blockchain-generated applications that users can use to trade, exchange, buy, sell, lend, and borrow assets from multiple networks. The Key Features of DeFi Permissionless The fact that DeFi does not require anything else apart from an internet connection to partake is one of the main reasons it is so attractive. Everyone can get a crypto wallet, regardless of their financial status and geographical location. Contrary to traditional finance, DeFi welcomes everyone and offers open access. Programmability This feature promises—or at least increases—the likelihood of DeFi having a bright future ahead of it. It means that new digital assets can be created based on the needs of the users, instead of the needs of a centralized body. While most of the solutions that DeFi offers at the moment are based on Ethereum and the ETH blockchain, it has more than enough support to address any financial service challenge. Transparency One of the main benefits that the DeFi system offers is its transparency. This means that everyone on the blockchain is given insight into the transactions, effectively having the ability to audit while keeping their privacy at the highest level possible. Namely, the identities of users are protected with anonymity, and the visibility over the system makes it trustworthy. Immutability As a term, immutability is a word for not being susceptible to change. All of the data on the blockchain can never be changed, which means that it cannot be tampered with—making it highly auditable and completely secure. This is one of the key features that give DeFi an advantage over the traditional financial systems. Interoperability Interoperability means that the applications built into DeFi are designed in a way that allows for easy integration between them. They complement each other and allow developers to create new solutions and add features to existing applications more conveniently. Composability like this also allows UI customization and integration of third-party apps. Non-Custodial Out of all the features we mentioned above, this is probably the most important characteristic of DeFi and the top reason that it has become so popular. It means that the assets and personal data are completely controlled by the user and no one else. This feature alone opens doors to a new age of financial services tailored specifically with the user in mind. Why the Popularity of DeFi Is Increasing At the beginning stages of the decentralized blockchain, there were only Bitcoin and Ethereum. Nowadays, there are whole new concepts like liquidity mining and yield farming that attracted the attention of millions of newcomers. Here are some of the most popular applications that contributed to the rise of decentralized finance: Decentralized Exchanges DeFi allows users to purchase cryptocurrency with fiat money and then exchange it as they please without mediation. This means that the users can trade currencies as much as they want without ever paying a fee to an external intermediary like a bank. Lending Platforms With the use of smart contracts, users can lend and borrow finances securely. The execution of this agreement is almost fully automated, so all parties involved can have an immediate and certain outcome without the need for intermediary third parties. Additionally, users lose no time when dealing with smart contracts. Stablecoins Cryptocurrencies are naturally volatile and widely deemed as unstable. For this reason, stablecoins like USDT, BUSD, and USDC are a nice addition to blockchain technology. They are coins tied to a traditional currency and can be used to maintain the stability of cryptocurrencies. Prediction Markets The place where users can bet on the futures of cryptocurrencies. Recently, it has become a very popular market, especially because there are no intermediaries.
Decentralized financeSmart Contracts in Blockchain: What They Are and How They WorkSmart contracts are self-executing computer protocols built on a blockchain network. They facilitate the execution of trusted transactions and pacts among anonymous individuals without the supervision or control of a third party. Additionally, they automate workflow and eradicate human errors by triggering the outcomes of predetermined conditions. Smart contracts run on a blockchain network, meaning that the terms and conditions are stored in an immutable, decentralized database. All the transactions are processed and recorded on the blockchain, automating payments and counterparties. How Do Smart Contracts Work? Smart contracts work by obeying basic if/then statements coded into a blockchain. A series of connected computers/nodes perform the next action when the coded statements are met. Such actions include sending digital assets to a given address, voting, registering a property, issuing event tickets, or notifications. The nodes then record the actions in the blockchain; hence, they cannot be altered. Smart contracts contain multiple options to ensure that the participants are satisfied with the task at hand. To arrive at a mutual agreement, the participants determine how transactions will be represented on the blockchain, give consent to the if/then statements that control transactions, search for ideal exemptions, and agree on a framework for determining disagreements. Here is a simple explanation of how a smart contract works. Assume Josiah wants to purchase a piece of land from Tyson. Instead of signing a paper-based agreement, they create a “digital agreement” and code it into the Cardano blockchain. This “digital agreement" between Josiah and Tyson contains the duration of payment, measurements, cost, and title deed of the property. In other words, the agreement looks like this: “WHEN Josiah pays Tyson 4,500,000 ADA, THEN Tyson will hand over the ownership rights to him.” Once this agreement is coded into the Cardano blockchain, it cannot be altered, implying Josiah can feel safe to pay Tyson 4,500,000 ADA for the property. If we eliminate smart contracts from this deal, Josiah and Tyson will incur enormous fees for intermediary services, and the deal may take several months to process due to manual verification. Why Should You Use Smart Contracts? Smart contracts have multiple benefits over traditional arrangements, including: Accuracy One of the basic requirements of a smart contract is recording all the predetermined terms and conditions clearly. This is because a slight omission can lead to severe errors. Besides, since smart contracts are automated, they eradicate human errors associated with filing mass amounts of paperwork. Transparency All the participants can access the predetermined terms and conditions of smart contracts, minimizing future disputes. Additionally, the transactions are recorded for future reference. Speed Smart contracts are software protocols built on Blockchain networks. Unlike traditional contracts, smart contracts perform transactions quickly. Security Smart contract records are encrypted, making them difficult to hack. Besides, since each recording block is connected to the previous and next block on a blockchain, hackers would have to modify the entire network to alter a single record. Savings Another significant benefit of smart contracts is eliminating expensive processes and intermediaries. They don’t require lawyers, government agencies, witnesses, and financial institutions to run. Guaranteed outcomes Smart contracts significantly reduce or even eliminate the need for litigation and courts. When two or more parties use a smart contract, they commit themselves to abide by the set rules and conditions as they are already aware of the consequence of not following them. Real-World Examples of Smart Contracts Inmusik A music streaming platform that decentralizes earnings and allocates them to the right content creator. It leverages smart contracts to validate content ownership via a transparent tagging mechanism. Pharma Portal Sonoco and IBM Blockchain use smart contracts to monitor temperature-controlled pharmaceuticals by increasing supply chain transparency. Tracr This platform uses smart contracts to offer end-to-end tracking of diamonds from mining to retail. Maersk and Tomcar also apply smart contracts to streamline the supply chain system. Limitations of Smart Contracts Despite the benefits of smart contracts, they are not without their limitations. The most prominent ones include: Difficulty in modifying Modifying smart contracts is almost impossible since even slight changes are time-consuming and costly. Possibility of loopholes Smart contracts may contain bugs that hackers can exploit. Vague terms and conditions Sometimes, smart contracts contain statements that some participants do not clearly understand or are not applicable in some jurisdictions. Most businesses and government agencies are embracing smart contracts at a high rate because of their innovative approach and benefits. They are essential for the thriving of the digital economy as they offer the much-needed automation, accuracy, speed, safety, and transparency for peer-to-peer platforms. It is clear that they will become far more commonplace in the future.
Decentralized financeWhat Is DeFi: Beginner’s Guide to Decentralized FinanceHow many times have you scratched your head in silence as your friends go on and on about this newfangled finance topic known as DeFi? How many times have you Googled ‘DeFi’ only to be tyrannized by the flurry of jargon? This has to end. In this article, we will explain what DeFi is and how it makes a difference. What Is DeFi? DeFi, short for decentralized finance, is an umbrella term for the emerging peer-to-peer financial services that run on blockchains. Cryptocurrencies like bitcoin are built on blockchain technology. They facilitate decentralized transactions, throwing centralized financial institutions and middlemen out of the picture. However, the scope of blockchain technology is not limited to coins and payment executions. DeFi applies blockchain technology to deliver complex financial use cases like insurance, lending, borrowing, yield farming, trading, staking, crowdfunding, and lotteries. Here, instead of a central authority or a third party, a smart contract facilitates the transactions. Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. Unlike traditional contracts, smart contracts don’t require tedious paperwork or expensive intermediaries. They are automatic and self-executing agreements, featured by transparency and immutability. Decentralized Finance vs. Centralized Finance How does DeFi stand apart from centralized finance? Here is a quick look. In centralized finance, assets and transactions are managed by a set of people or institutions. Centralized finance is not confined to institutions based on fiat currency. For example, many popular crypto exchanges like Coinbase and Binance use a centralized business model similar to traditional stock exchanges. When it comes to decentralized finance, DeFi protocols do the part. Instead of humans, you place your trust in predefined algorithms. As you sign up for centralized financial services, you hand over the control of your assets to the platform. If the platform’s security is at risk, so are your funds. In decentralized finance, you keep your assets in decentralized wallets like Metamask. Here, nobody can access your funds except you, as long as the password is hidden. The Benefits of DeFi Transparency DeFi replaces trust with transparency. The transactions on a DeFi application can be seen and verified by anybody. Atomicity DeFi transactions are made indivisible by blockchain technology. All the sequential actions in a transaction have to be completed for it to process, or else they fail collectively. Anonymity DeFi applications provide users with better anonymity than their centralized counterparts. They don’t ask for your name, phone number, or ID. All you need is a wallet address to get started. If your jurisdiction bans cryptocurrency, the government can always freeze your assets in centralized applications. Your best bet in this scenario for the safekeeping and transaction of digital assets would be DeFi. Faster trading DeFi can facilitate the exchange of cryptocurrencies faster since decentralized exchanges rely on automated market-maker (AMM) protocols rather than limit order books. Open around the clock DeFi services like lending, borrowing, yield farming, and insurance are available throughout the day. Accessible to all The most attractive feature of DeFi is that it makes financial freedom feasible for all. Passive streams of income like yield farming and liquidity mining opened our eyes to the massive potential of DeFi. When applying for a DeFi service, your income, financial statements, and credit score don’t matter. The Risks of DeFi For starters, smart contracts lack the human element, which is key to making decisions in many circumstances.If any error makes its way to the smart contract, all transactions are at risk. The blockchain ecosystem is still figuring out interoperability and cross-chain transactions. The erratic fluctuations and volatility in the market can lead to huge losses. Moreover, if you lose access to your wallet, all your funds are gone. There is no way of retrieving them. What Is the Future of DeFi? In the last two years, DeFi has played a key role in bringing cryptocurrencies to the mainstream. The innovative streams of revenue characterized by transparency and anonymity continue to lure people in. The huge market caps of DeFi tokens stand testimony to its success. However, DeFi is not without its share of limitations. Like all blockchain applications, DeFi is still in its infancy. The industry is prone to scams, frauds, and failures like its centralized counterpart. With a more robust infrastructure, will DeFi and DeFi 2.0 find their way to the masses? Only time will tell.
Decentralized financeBrief History of Bitcoin: The Beginning of DeFiUnderstanding the history of DeFi requires an understanding of the cryptocurrency genesis. Bitcoin was the first decentralized payment solution; some argue this could even be the first DeFi protocol. Regardless, the creation of Bitcoin led to the arrival of Ethereum, which lay the building blocks of DeFi as we know it today. What Is Bitcoin? Bitcoin is a digital currency that functions free of any central control of traditional banks or governments. It relies on a peer-to-peer network built on blockchain technology. Every transaction is recorded on the Bitcoin network and is publicly accessible by anyone with an internet connection. Users can access this cryptocurrency through crypto exchanges that help connect buyers and sellers. Why Was Bitcoin Created? The anonymous group or person, Satoshi Nakamoto, established Bitcoin in 2009 as a response to the financial crisis of 2008. Satoshi had the idea of disintermediating banks from their control over financial transactions. Several years down the line, Bitcoin has evolved and is now hailed as an icon of decentralization and financial autonomy. Some investors also see Bitcoin as a hedge against inflation due to its deflationary structure and fixed supply of 21 million coins. How Has the Value of Bitcoin Changed Over the Years? The Bitcoin price chart currently sits around $38,000. However, this has not always been the case, as this cryptocurrency has always had a volatile price history. In the early days of Bitcoin valuation, the cryptocurrency was almost zero. However, all that changed when its price jumped from $0.09 to $29.60 within the span of a year (2010 - 2011). Consistent price fluctuation has become synonymous with the Bitcoin market. Bitcoin has continued to experience several rallies and crashes throughout its existence as speculative retail investors and traders entered the space. In 2017, the BTC price broke new heights by attaining a massive spike of $2,000 from $1,000. At this stage, mainstream investors, government institutions, and even traditional banks started to recognize the presence of bitcoin and started trying to adjust to the upwardly mobile prices that BTC reflected at the time. A couple of years later, cryptocurrencies have grown in popularity across the board, with Bitcoin remaining the leader of this new class asset. Institutional investors have started taking an interest in Bitcoin, and as their money tricked in, the price soared, reaching highs of more than $60,000 in 2021. How Is the Bitcoin Price Influenced? The price of Bitcoin depends largely on perceived value, supply, and demand. Its price is not regulated by any individual, government, group, or entity. By design, there will only ever be 21 million bitcoins created, eliminating the mass production of bitcoins and curbing inflation. Its deflationary mechanism means that the closer Bitcoin gets to its limit, the higher its price will be, as long as demand remains the same or increases. Aside from its in-built inflation control system, other factors that may influence the price of Bitcoin include: Fluctuations in supply and demand.Media attention on cryptocurrenciesThe implementation of regulations for managing Bitcoin's utility and scalabilityThe cost of Bitcoin miningSynthetic products and Bitcoin derivatives Will We Use Bitcoin for Years to Come? Bitcoin's value proposition as a decentralized payment solution hasn't budged in the last twelve years. With governments around the world taking a harsher approach towards controlling the financial capabilities of their constituents, we may see more people flock towards Bitcoin and its offerings to counter government overreach and censorship. As traditional investors and Wall Street bankers start to embrace Bitcoin, the lines between conventional financial assets and Bitcoin become blurred. Leading Wall Street investors allocate up to 5% of their portfolios to Bitcoin, which may indicate that the cryptocurrency has grown big enough that its market cap will catch up with gold in the future. Perhaps, one day, it could be worth more than gold! El Salvador was the first country to adopt Bitcoin as its legal tender. If their experiment proves successful, we may see more nations that suffer from similar economic predicaments to El Salvador toe this line. This could bring Bitcoin to the level of true mass adoption, ushering in the age of the "hyperbitcoinized world." However, there is still a chance that things will go downhill. Governments may frown upon the growth of Bitcoin since they cannot control it, and they may implement massive regulations that stifle its adoption rate. This type of heavy-handed regulation likely won't kill Bitcoin, but it could seriously tank its price, bringing about a long-term bear market. Whether bullish or bearish, the future of Bitcoin remains unpredictable. The best thing investors can do is constantly do their research and keep up with the news to stay afloat in this space. In the end, the users and the Bitcoin community should brace for future challenges to the Satoshi experiment. Overcoming these obstacles will require innovation, perseverance, and education.