Blockchain finance with Ethereum
Any financial system needs of course money, The first shot would be to use bitcoin or Ether as the Ethereum cryptocurrency as fuel for our DeFi. Well indeed Bitcoin is decentralized money but it has very basic programmable functionalities which are not compatible with the Ethereum platform.
Ether is programable and compatible but it is highly volatile. If we are looking for building reliable financial system services that people want to use, we will need a more stable currency to operates within the system. This is where stable coins come in!
Stable coins are cryptocurrencies that have a direct link to real-world assets, usually the US dollar. For DeFi, we want to use a stable coin that isn’t using fiat money reserves for maintaining its value. This will leads us to DAI stable coin, which is a coin that is pigged to the US dollar. It means 1 DAI = 1 US $.
Unlike other stable coins, that are linked to the reserve authority, DAI is backed by cryptocurrency collateral, which means if you deposit $1 worth of Ether, you can borrow $0.66 worth of DAI. And as soon as you want your Ether back, just pay back the DAI you borrowed and your Ether will be released. In case you don’t have Ether to lock up, you can buy DAI on an exchange.
Because DAI is overcollateralized, Even if Ether’s price becomes extremely volatile, The value of a lot of Ether backed in the DAI in circulation will most luckily remain the same. Which makes DAI a perfect form of money for other DeFi services.
DEX or decentralised exchange blockchain finance service
DEX operates following a set of rules or smart contracts that allow users to sell, buy or trade cryptocurrencies. Just like DAI, it resides on the Ethereum platform. When you trade on a DEX, there is no exchange operator, no signup and no identity verification and no withdraw fees, instead, the smart contract enforces the rules, executes trades, and securely handles funds when necessary. Also, unlike centralized exchange, there is no need to deposit funds into an exchange account before conducting a trade. This eliminates the major risk of exchange hacking.
Decentralised money markets
DeFi doesn’t stop there, there is also what we call a Decentralised money market. Which are services that connect borrowers with lenders. There are already built Ethereum platforms for borrowing and lending debt. meaning you can lend your crypto wallet and earn crypto interest on it. Alternatively, maybe you need some money to pay the rent or buy groceries, but the only money you have is cryptocurrencies. If that’s the case, you can deposit your cryptocurrencies as collateral and borrow against them. These platforms automatically connect lenders with borrowers, enforces the terms of the loans, and distribute interests. These blockchain finance platforms becomes lately very popular.
Why insurance, because all these new financial services entailed some risks. So why not create a service that insurance my funds in case something goes wrong? Well, here comes the decentralized platforms that connect people who are willing to pay for insurance with people who insure them. Well, everything happens autonomously, without insurance companies or agents in the middle.