This is some confusing crypto geek shit
The two main things I want to know are can I make loads of money if I buy some, and could we use it to avoid globalist control?
I have no idea what I’m talking about so this post is here more to help me understand it than to tell anyone else anything.
What is DEFI?
DeFi is short for “decentralized finance”
It could potentially cut out the globalist banker leeches that are fucking us over. (Maybe)
Most applications that call themselves “DeFi” are built on top of Ethereum
That’s because Ethereum’ is set up for smart contracts – which automatically execute transactions if certain conditions are met.
With smart contracts at the core, dozens of DeFi applications are operating on Ethereum, and Ethereum 2.0, a coming upgrade to Ethereum, could give these apps a boost by improving Ethereum’s scalability issues.
The most popular types of DeFi applications include:
- Decentralized exchanges (DEXs): Online exchanges help users exchange currencies for other currencies, whether U.S. dollars for bitcoin or ether for DAI. DEXs are a hot type of exchange, which connects users directly so they can trade cryptocurrencies with one another without trusting an intermediary with their money.
- Stablecoins: A cryptocurrency that’s tied to an asset outside of cryptocurrency (the dollar or euro, for example) to stabilize the price.
- Lending platforms: These platforms use smart contracts to replace intermediaries such as banks that manage lending in the middle.
- “Wrapped” bitcoins (WBTC): A way of sending bitcoin to the Ethereum network so the bitcoin can be used directly in Ethereum’s DeFi system. WBTCs allow users to earn interest on the bitcoin they lend out via the decentralized lending platforms described above.
- Prediction markets: Markets for betting on the outcome of future events, such as elections. The goal of DeFi versions of prediction markets is to offer the same functionality but without intermediaries.
In addition to these apps, new DeFi concepts have sprung up around them:
- Yield farming: For knowledgeable traders who are willing to take on risk, there’s yield farming, where users scan through various DeFi tokens in search of opportunities for larger returns.
- Liquidity mining: When DeFi applications entice users to their platform by giving them free tokens. This has been the buzziest form of yield farming yet.
- Composability: DeFi apps are open source, meaning the code behind them is public for anyone to view. As such, these apps can be used to “compose” new apps with the code as building blocks.
- Money lego: Putting the concept “composability” another way, DeFi apps are like Lego, DeFi apps can be similarly put together like “money lego” to build new financial products.
Lending markets are one popular form of DeFi, which connects borrowers to lenders of cryptocurrencies. One popular platform, Compound, allows users to borrow cryptocurrencies or offer their own loans. Users can make money off of interest for lending out their money. Compound sets the interest rates algorithmically, so if there’s higher demand to borrow a cryptocurrency, the interest rates will be pushed higher.
DeFi lending is collateral-based, meaning in order to take out a loan, a user needs to put up collateral – often ether, the token that powers Ethereum. That means users don’t give out their identity or associated credit score to take out a loan, which is how normal, non-DeFi loans operate.
Another form of DeFi is the stablecoin. Stablecoins peg cryptocurrencies to non-cryptocurrencies, such as the U.S. dollar, in order to keep the price stable.
One of the oldest DeFi applications on Ethereum is a so-called “prediction market,” where users bet on the outcome of some event, such as an election.
The goal of the participants is to make money, though prediction markets can sometimes better predict outcomes than controlled methods, like polling. Centralized prediction markets with good track records in this regard include Intrade and PredictIt. DeFi has the potential to boost interest in prediction markets, which have traditionally been shut down by governments.
How do I make money with DeFi?
The value locked up in Ethereum DeFi projects has been exploding, with many users reportedly making a lot of money.
Using Ethereum-based lending apps, as mentioned above, users can generate “passive income” by loaning out their money and generating interest from the loans. Yield farming, described above, has the potential for even larger returns, but with larger risk. It allows for users to leverage the lending aspect of DeFi to put their crypto assets to work generating the best possible returns. However, these systems tend to be complex and often lack transparency.
Is investing in DeFi safe?
No, it’s risky. Many believe DeFi is the future of finance and that investing in the disruptive technology early could lead to massive gains.
But it’s difficult for newcomers to separate the good projects from the bad. And there has been plenty of bad.
As DeFi has increased in activity and popularity through 2020, many DeFi applications, such as meme coin YAM, have crashed and burned, sending the market capitalization from $60 million to $0 in 35 minutes. Other DeFi projects, including Hotdog and Pizza, faced the same fate, and many investors lost a lot of money.
In addition, DeFi bugs are unfortunately still very common. Smart contracts are powerful, but they can’t be changed once the rules are baked into the protocol, which often makes bugs permanent and thus increasing risk.
When will DeFi go mainstream?
While more and more people are being drawn to these DeFi applications, it’s hard to say where they’ll go. Much of that depends on who finds them useful and why. Many believe various DeFi projects have the potential to become the next Robinhood, drawing in hordes of new users by making financial applications more inclusive and open to those who don’t traditionally have access to such platforms.
This financial technology is new, experimental and isn’t without problems, especially with regard to security or scalability.
Developers hope to eventually rectify these problems. Ethereum 2.0 could tackle scalability concerns through a concept known as sharding, a way of splitting the underlying database into smaller pieces that are more manageable for individual users to run.
How will Ethereum 2.0 impact DeFi?
Ethereum 2.0 isn’t a panacea for all of DeFi’s issues, but it’s a start. Other protocols such as Raiden and TrueBit are also in the works to further tackle Ethereum’s scalability issues.
If and when these solutions fall into place, Ethereum’s DeFi experiments will have an even better chance of becoming real products, potentially even going mainstream.
Bitcoin as DeFi
While Ethereum is top dog in the DeFi world, many proponents of Bitcoin share the goal of cutting the middleman out of more complex financial transactions, and they’ve developed ways to do so using the Bitcoin protocol.
Companies such as DG Labs and Suredbits, are working on a Bitcoin DeFi technology called discreet log contracts (DLC). DLC offers a way to execute more complex financial contracts, such as derivatives, with the help of Bitcoin. One use case of DLC is to pay out bitcoin to someone only if certain future conditions are met, for example, betting on the outcome of a sports event.
Well that sort of makes sense, but I still don’t really get all this – first question – apart from Etherium, what other tokens are popular for Defi?
Tokens currently represent the vast majority of smart contract applications. Chainlink aims to bring the power of smart contracts to the real world.
Chainlink brings outside data into smart contracts. Ethereum Smart contracts can now act on other asset prices, global occurrences and make calls to other APIs. Chainlink makes smart contracts really smart.
It also incorporates real-world data. For example, it allows farmers to hedge against a bad season. The smart contracts filtered through Chainlink pay out insurance claims if values in the contract like share price, temperature or rainfall do not meet a certain standard. Instant payments deploy as soon as the program receives the appropriate weather data. Chainlink’s potential seems limitless and many of the top DeFi apps pay huge amounts for the LINK token to use their platform.
Uniswap is an Ethereum-based DApp for exchanging Ethereum tokens through liquidity pools. Uniswap provides 2 core products: providing and using liquidity.
Uniswap offers users the ability to exchange Ethereum-based cryptocurrencies instantly by tapping into its smart contract liquidity pools. These liquidity pools are filled by other users, who earn the exchange fees for providing liquidity.
Uniswap fees must be paid with the UNI token, making it one of Benzinga Crypto’s top picks for this market cycle.
Stellar Lumens (XLM)
Stellar, a decentralized platform for uniting the world’s various banking systems, uses different, disconnected payment methods (ACH, SEPA, SPEI, etc). Stellar’s network connects these systems through a decentralized ledger, with on-off ramps for every payment method.
Stellar’s closest competitor, Ripple, faces SEC investigation. Stellar has a prime opportunity to seize the moment and take its best shot at becoming the global payment network.
To prevent spam on the Stellar Network, users must pay a transaction fee and meet a margin requirement in Stellar’s token, Lumens (XLM).
Decentralized lending offers higher interest rates than centralized lending with better security and anonymity. Aave, one of the leading lending protocols around today, means borrowers must offer collateral greater than the amount they borrow into the loan smart contract. The smart contract safely holds collateral in escrow throughout the term of the loan, replacing the need for a trusted middleman.
Should the borrower default, the lender gets automatically paid by the smart contract.
Aave offers 10% APY for certain stablecoin loans with no know-your-customer (KYC) required, a product unheard of in traditional finance.