Decentralized Finance (DeFi)
What is DeFi?
DeFi refers to a financial service built on blockchain technology. The decentralized nature of blockchain allows DeFi to be accessible to anyone and does not require a certified government ID. More specifically, DeFi allows for peer-to-peer interaction between buyers, sellers, borrowers, and lenders based on the financial transaction services they perform.
Regardless of race, age, or cultural identity, DeFi can be used to access financial services such as money deposits, loans, and insurance that are used to mediate through centralized financial (CeFi) organizations. As a result, users gain more control over their money to eliminate the need for an exploitative system of intermediaries and mitigate the impact of different economies to avoid the global recession crisis.
How does Defi work?
In the DeFi system, smart contracts play a significant role and replace financial institutions in the transaction. Smart contracts allow users to hold funds and send or return them based on certain conditions. Furthermore, no one can change its expiration date when smart contracts go live, and smart contracts will always run as programmed.
For example, a smart contract is designed to send money from account A to account B each month. However, it will only do so if account A has the required funds. Furthermore, no one can change the settings of the smart contract, which means that it is not possible to add account C as a recipient to steal funds.
On the other hand, smart contracts are also public and can be inspected and reviewed by anyone. This means that all smart contracts tend to be quickly monitored by the users involved in the transaction. With these transparency characteristics, all smart contracts will become better to improve transaction quality.
What are the differences between DeFi and CeFi?
In the traditional centralized financial system (CeFi), transferring, remitting, borrowing money, and other transactions will entirely rely on APP, URL, and account password provided by the highly trusted centralized third-party institutions.
However, Decentralized financial (DeFi) is based on blockchain technology, allowing anyone or institutions not to control by third-party institutions. The peer-to-peer network on DeFi can realize the real-time transfer and remittance of funds and other financial transactions from individual accounts to separate accounts. The whole process only requires a personal wallet address without the flow of intermediary institutions. At the same time, under the control and protection of smart contracts, all participants can complete the transaction without providing personal privacy data, which is fast, convenient, efficient, and safe.
Because of the centralized characteristics of traditional finance, the operation process is not transparent and easy to provide a platform for illegal financial practices. However, the transactions on DeFi are transparent and fair on smart contracts so that users can navigate through the code to write specific requirements. In addition, its smart contract is open source and can be consulted and monitored by all participants.
What are the benefits of DeFi?
- More efficient: Remove the rent-seeking monopoly of financial intermediaries
- More open and accessible for financial services
- Transparency: Anyone can conduct available transactions through smart contracts
- Regulation-free and censorship-resistant
- Easier integration of different financial services
- DeFi transactions are more efficient than CeFi (e.g. loan review, funding process)
What are the cons of DeFi?
- Unscalability: Trades on the DeFi protocol can become very expensive during periods of congestion
- Uncertainty: The DeFi project's blockchain is unstable sometimes
- Liquidity concern: DeFi has low liquidity in transaction matching sometimes
Decentralized finance seeks to create new financial services separate from traditional economic and political systems, thereby allowing for a more open financial system that promises to prevent censorship and discrimination worldwide.
When the entire decentralized financial system is established, DeFi will take back the reins from large centralized organizations and put control in the hands of open source communities and individuals.
Some of Defi Tokens listed on TruBit
- Compound (COMP) is an algorithmic, autonomous interest-rate protocol on the Ethereum blockchain. The compound has grown to become one of the cornerstones of the DeFi industry. Built for developers, Compound creates efficient money markets where assets can be supplied and borrowed by individuals without any restriction (e.g., KYC). Interest rates are compounded at a block level on the Ethereum blockchain, and no central party is required.
- Aave Protocol (AAVE) is a blockchain-based protocol powering a non-custodial money market that involves borrowers and lenders/depositors. It is a decentralized cryptocurrency collateral loan protocol that is open source and unregulated, its code is accessible to all users, it is fully transparent and trackable, and it can be audited by all.
- DODO (DODO) features capital-efficient liquidity pools that support single-token provision, reduce impermanent loss, and minimize slippage for traders. The trading platform also offers SmartTrade, a decentralized liquidity aggregation service that routes to and compares various liquidity sources to quote the optimal prices between any two tokens. In addition, it removes roadblocks hindering liquidity pool creation for the issuance of new assets such as asset ratios, liquidity depths, fee rates, and other parameters that can be customized and configured in real-time.
- SUSHI is the native token of SushiSwap. SushiSwap is a decentralized cryptocurrency exchange and automated market maker built on Ethereum. SushiSwap automatically sets prices with mathematical formulas and processes trades using smart contracts. It lets users trade cryptocurrency tokens, but there are no central authority managing trades.