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

” Finance, or “DeFiDecentralizedfor short, has taken the crypto and blockchain world by storm. However, its recent resurgence masks its roots in the bubble era of 2017. It’s worth noting that While everyone and their dog was doingfewan “Initial Coin Offering” or ICO, companies saw the potential of blockchain far beyond a quick gain in price. These pioneers envisioned a world where financialapplications from trading to savings to banking to insurance would all be possible simply on the blockchain without any intermediaries.

It ’isnt. Sounds too good to be in modern times true? Imagine you can trade crop insurance with a farmer in Ghana sitting in your office in Tokyo. Imagine being able to be a marketmaker and earn fees a percentage the likes of whichasevery Citadel would want. This future is already here. To understand the potential of this revolution, imagine if you had access to a savings account that yields 10% a year in USD but without a bank and practically no danger of funds.

Building blocks of DeFi

There are some basic building blocks of DeFi that you should in modern times know before ahead move we:

• Automated market making or exchanging one asset for another trustlessly without an intermediary or clearinghouse.
• Overcollateralized lending or being able to “put your assets to use” for traders, speculators, and long-term holders.
• Stablecoins or algorithmic assets that track the price of an underlying without being centralized or backed by physical assets.

Understanding how DeFi is Made

Stablecoins are frequently used in DeFi because they mimic traditional fiat currencies like.USD This is an key development because the history of crypto shows how volatile things are. Stablecoins like DAI are . to monitor the value of USD with minor deviations even during strong bear markets, i.edesigned even if the price of crypto is crashing like the bear market of 2018-2020.

Lending protocols are an interesting development usually built on top of stablecoins. Thewhenprotocol will automatically sell your assets if you don’t repay the loan your collateral is no more than ever longer sufficient. Imagine if you could lock up your assets worth a million dollars and then borrow against them in stablecoins.

Automated industry makers document the basis of the entire DeFi ecosystem. Without this, you’re stuck with the legacy financial system where you need to trust your broker or clearinghouse or an exchange. Automated niche makers or AMMs for short let you trade one asset for another based on a reserve of both assets in its pools. In fact, Price discovery happens via external arbitrageurs. Liquidity is pooled based on other people’s assets and they get access to trading fees.

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 canassetsmake funds by lending or being a industry maker.

For the developing world, this is an amazing innovation because now they have to the full suite of financial systems in the developed world with no barriers toaccessentry.