Decentralized Finance (DeFi) on Ethereum: The Future of Finance?

Decentralized Finance, or “DeFi” for short, has taken over the crypto and blockchain world. However, its latest revival masks its roots in the 2017 bubble era. While everyone and their dog were making an “Initial Coin Offer” or ICO, few companies saw the potential to block more than a profit. fast in price. These pioneers envisioned a world where financial applications from trade to savings to banks to insurance would all be possible simply on the blockchain without any intermediaries.

To understand the potential of this revolution, imagine if you had entered into a savings account that gives 10% per annum in USD, but without a bank and practically no risk of funds. Imagine being able to trade crop insurance with a Ghanaian farmer sitting in your Tokyo office. Imagine being able to trade and earn tariffs as a percentage, the likes of which every Citadel would want. Sounds too good to be true? It’s not This future is already here.

DeFi building blocks

There are some basic DeFi building blocks you need to know before moving forward:

  • Making an automated market or exchanging one asset for another without trust without a broker or clearing house.

  • Collateralized loans or being able to “put your assets to use” for traders, speculators and long-term holders.

  • Stable or active algorithmic currencies that follow the price of a basic base without being centralized or backed by physical assets.

Understanding how DeFi is made

Stablecoins are often used in DeFi because they mimic traditional fiat currencies like the USD. This is an important development because the history of cryptography shows how volatile things are. Stablecoins like DAI are created to track the value of the USD with small deviations even during strong bear markets, i.e. even if the price of crypto is falling like the 2018-2020 bear market.

Borrowing protocols are an interesting development, usually built on top of stable currencies. Imagine if you could close your $ 1 million worth of assets and then borrow against them at stainco. The protocol will automatically sell your assets if you do not repay the loan when your collateral is no longer sufficient.

Automated market makers form the basis of the entire DeFi ecosystem. Without this, you are stuck in the inherited financial system, where you have to trust your broker or office or an exchange. Automated market makers or AMMs briefly allow you to trade one asset with another based on a reserve of both assets in its groups. Price disclosure occurs through external arbitration. Liquidity merges based on other people’s assets and they gain access to trading tariffs.

You can now gain exposure to a wide variety of assets, all in the Ethereum ecosystem and without ever having to interact with the traditional financial world. You can make money by borrowing wealth or being a market maker.

For the developing world, this is an amazing innovation because now they have access to the complete set of financial systems in the developed world without any barriers to entry.