Blockchain Finance or Defi, a Promising Growth Economy
Decentralized finance or DeFi, is the new building block in blockchain finance. Today aside from sending money from one to another, We use a variety of other financial services. For example, loans insurance, saving plans and stock markets, are services that are built around money and together create our financial system.
Posted by Hicham ALAOUI RIZQ on 20 Apr, 2021
What is DeFi, Will it change the future of finance as we know it
Today our financial system and its services are fully centralized. Which means it relies on a central authority.
These CFi (Centralised finance) has its own risks, miss management, fraud or corruption to name a few. But what if we could decentralise the financial system as a whole in a same way that Bitcoin decentralised money. That’s exactly what DeFi is all about!
DeFi is a term given to financial services that have no central authority or someone in charge. Using decentralize money or certain cryptocurrency that can be programmed for automotive activities, we can build exchanges, lending services, insurance companies that don’t have any ownership or are controlled by anyone.
To create a decentralized financial system. The first we need is an infrastructure for programming and running decentralized services. Luckily Ethereum does just that.
Etheruem is a DIY platform for writing decentralized applications known as well, Dapps. Thanks to Ethereum, we can write a smart contract that determines the rules of how some services will work and once we deploy those rules on the Ethereum network, we no longer have control over them, They are immutable.
Till now once Ethereum is in place, we can start building the decentralized apps, but here is the building block that comprises it.
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.
Thus, the DeFi services work in conjunction to work with one another, making it possible to mix and match different services to create new and exciting opportunities. Kind of resembles to use lego blocks and get creative with whatever you want to build, For example, you can build the following service from different money legos starting with a service for swapping a stable coin, trade on a DEX platform, and insure them, Ask for intCount 's services for such a DeFi compounds building and creation.
Transparency || Decentralisations || Interoperability || Free for all || Flexibility
Still in its infancy || Hackers exploit existing loopers to steal money || Some services are still partially centralized
To summit up, DeFi has reached its early adopter stage, and the coming years will tell if it manages to cross the mainstream adoption. There is no doubt that DeFi will radiate financial discrimination, high fees, and inefficiency in managing the funds.