What is Decentralized Finance (De-FI)?
Coinmarketcap defines DeFi as, “Decentralized finance, or DeFi, is the ecosystem of financial applications being built with blockchain technology.”
This is basically financial services using smart contracts which are automated enforceable agreements that don’t need a bank or lawyer but use the online blockchain technology instead. For example even making a simple transaction using your bank card which is run by Visa, Paypal, Mastercard it has the middle man who has the authority to accept or decline your transaction. With DeFi technology you have full control over your assets/token.
What is Decentralized Finance (De-FI)?
If we look at the numbers between September 2017 and August 2020 the total value locked up in DeFi contracts has exploded from US$2.1 million to US$6.9 billion (£1.6 million to £5.3 billion). Since the beginning of August alone it has risen by US$2.9 billion. All the tradeable tokens that used for DeFi smart contracts have had an increase in demand hence why this has driven the value of the coins considerably higher in a short period of time. For example, Synthetix Network Token has increased more than 20-fold, and Aave almost 200-fold. So if you had bought £1,000 of Aave tokens in August 2019, they would now be worth nearly £200,000.
Most of the DeFi are built on the Etheruem blockchain network, one specific area which has attracted the peers towards DeFi is cryptocurrency trading on decentralised exchanges (DEXs) such as Uniswap. These entirely peer to peer without any company or institution providing the platform. At the moment Synthetix (SNX) is the one that has increased in value in a considerably short period of time. SNX is a decentralized exchange where you can trade just about any asset with no broker or banker as a middleman — and therefore enjoy vastly lower transaction costs and far less time for settlement.
At the moment you can only buy it on Binance. Other coins that have risen dramatically in 2020 are listed in the link below: BUT its too late to be diving in right now. They could of course simply keep going upwards, but markets rarely, if ever continue up in a straight line. Just like BTC in 2017 it eventually pulled back and quite dramatically. The best advice is we will look for a big pullback or new defi coins to come along in the future that fit our criteria.
Other uses of DeFi are :
- Borrow and lend cryptocurrencies to earn interest using platforms such as Compound or Aave.
- Bet on the outcome of events using Augur.
- Create and exchange derivatives of real-world assets such as currencies or precious metals on Synthetix.
- Take part in a no-loss lottery on PoolTogether, where everyone gets their money back and one lucky participant wins all the interest that has accrued in a shared pot.
- Buy cryptocurrencies known as stable coins, which are pegged to the value of a particular currency or commodity. For example, DAI and USDC are both pegged to the US dollar. (there is no point buying these if you hope to make a profit. They are useful though if you want to sell some crypto but do not want to convert it back into fiat currencies):
Coming back to Smart contracts you will most likely be able to buy and sell houses in the future on a DeFi platform under a mortgage agreement where you pay the price over a period of years. The deeds would be put up in a tokenised form on a blockchain ledger as collateral and, in the event that you defaulted on your repayments, the deeds would automatically shift to the lender. As no lawyers or banks are required this makes the whole process of buying and selling a lot cheaper.
Why has it grabbed so much attention?
With DeFi we no longer need to know each other’s identities or that the lender assesses the borrower’s ability to repay the debt. If we used a bank we would have to go through all the legal requirements and credit checks. Therefore now we could buy a house without the need of a bank if for example, a person couldn’t qualify for a mortgage because he didn’t earn enough or didn’t have enough for a deposit.
However, this does pose a risk as individuals are putting their money into unregulated space and can’t go seek legal help if something goes wrong during the process as we don’t have any clear regulations yet. Everything is about mutual trust and preserving privacy in this kind of business. Of course, the banks are against using these private DeFi tokens as they won’t be able to make money from it. Hence why a second reason for the DeFi surge is many high street financial institutions are beginning to accept Defi and are also looking for ways to participate.
For example, 75 of the world’s biggest banks are trialling blockchain technology to speed up payments as part of the Interbank Information Network, spearheaded by JP Morgan, ANZ and Royal Bank of Canada. As we can see the financial sector is going through a new phase of innovation and it DeFi shows a lot of potential to change the whole game by giving more visibility to people on their transactions.
Major asset management funds are starting to take DeFi seriously as well. Grayscale, the world’s largest crypto investment fund. In the first half of 2020, it was managing over US$5.2 billion of crypto assets, including US$4.4 billion of bitcoin.
Another reason is due to COVID-19 which has driven the interest rates to near negative and people are not gaining interest on their cash in the banks. Hence why they want to seek alternatives where they could grow their money.
What is Decentralized Finance (De-FI)?
DeFi offers a much higher return to savers; Compound, for example, offers an annual interest rate of 6.75% for those who save their stable coin Tether, not only do you get interest, you also receive Comp tokens, which is an added attraction. Also, it gives an opportunity to people without a bank account to give them an alternative option to finance their way in the market. People are also investing in these token so that they are not left out of their explosive growth and see this an opportunity of a lifetime.
The EU, US, Japan and UK are printing money every day to pump it into the economy but how long can this go on for? The value of fiat money is depreciating every year and it could get to a point somewhere in the future where they will be worthless when it all goes bust (US $ is pretty much already there). They don’t want the people to lose trust in them hence why for the past couple of years around 50% of the high street banks have been investing billions in creating their blockchains so that they can launch their own crypto. A way where they can again try to attract the people to gain their trust.
In Conclusion to your question ‘What is Decentralized Finance (De-FI)?’ I believe DeFi will be the way forward for the financial sector mainly due to the number of advantages this gives to the people. It removes the middle man who controls someone else’s money example Bank, Visa, Mastercard etc and gives the people control over their money, giving them full visibility. Transactions to send, receive money will be considerably cheaper and also done within seconds instead of days.
Furthermore, we could use smart contracts to buy and sell houses again without the lawyers and banks making this process a lot quicker. The only disadvantage I see here is the lack of regulations in this sector and the fact that we need to base the transactions we do with other people on trust. I would need to feel more confident about the security of my funds before lending it, but it will probably become more secure in the near future.
The other thing to consider of course is can we trust our own banks with our money!
Ashley De Sousa