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How DeFi services will replace banking applications

Published 15/02/2021, 09:49
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What is DeFi and what is their goal

In the spring of 2019, the crypto world turned: the market captured a new trend - decentralized finance. Forbes magazine called this sector of the economy "a new dynamic that revived the cryptocurrencies industry." Since then, the trend has only gained momentum and is beginning to pose a real threat to the traditional banking sector - the potential of all DeFi projects today is estimated at more than a trillion dollars.
What is DeFi? DeFi - financial instruments created on the Ethereum blockchain platform. Decentralised finance, which translates to the abbreviation "DeFi," was originally designed to compete directly and replace traditional centralised banking services, replacing traditional technologies with an open-source protocol. The idea is based on the possibility of completely replacing all banking services in a decentralised format, as well as giving any user full control over its assets.

As we mentioned above, most DeFi projects have been created on the Ethereum blockchain, but recently there has been a shift in the interests of developers in favour of other blockchains, for example, Binance Chain. Actually, Ethereum was not chosen as the basis by chance. Initially, this blockchain protocol was created as a full-fledged ecosystem for the development of decentralised applications in various areas, which significantly facilitated the work of developers and eliminated the need to attract a large number of investors.

What types are there DeFi

In general, there are quite a few categories of DeFi projects, but it would be worth highlighting several of them:

Decentralized Trading Exchanges (DEX).

These are protocols that use liquidity bullets to ensure instant purchase and exchange of assets with the payment of a minimum fee to the service. In essence, their technical difference from centralized exchanges is the absence of restrictions imposed by a third party or the company that owns the exchange.

Credit Protocols

The name of this type speaks for itself. These projects make it possible to receive and provide loans on the security of other assets, as well as allow investors to contribute funds to the pool at interest.

Synthetic assets

The meaning of this type of project is the ability to create assets on the blockchain and gain access to real sector markets. For example, synthetic assets on the Synthetix platform. The token allows you to operate in other digital currencies without actually having a base asset.

Payment networks

Unlike traditional banks, they allow you to process thousands of transactions at the same time, spending a minimum of time with low fees.

Which DeFi projects are most popular today

1. Uniswap

Protocol based on the Ethereum blockchain, designed for asset exchange. The project involves the possibility of earnings, providing liquidity to the protocol. As a reward to liquidity suppliers, the fee charged is 0.3% for each exchange transaction. The warrant books in this project are replaced with liquidity pools, so anyone can exchange tokens ERC-20 and ETH itself.

2. MakerDAO

Perhaps the most popular credit protocol to date. The platform supports the DAI dollar stablecoin. The user opens the vault, blocks the cryptocurrency as a pledge and on the basis of this pledge receives an equal amount of DAI, which can then be output to the fiat.

3. Compound

Another loan project, which is a financial market that allows you to take secured loans and earn interest on deposits. Interest is accrued instantaneously after the introduction of funds into the liquidity pool, and rates change every 15 seconds. The borrower has the right to borrow up to 75% of the total value of the internal token cTokens in which all liquidity is stored.

4. Synthetix

We have already mentioned this project above. This platform is designed to create synthetic assets. All funds on the platform are transferred to the SNX internal token and the value of the assets corresponds to the value of real assets: be it fiat or raw materials. Users block an internal token or ETH as collateral and receive revenue from transactions that are made on the Synthetix.Exchange.

5. Yearn.Finance

The project is a credit services aggregator that allows you to access the protocols Compound, Dydx, Aave and Fulcrum with automatic selection of the most profitable investment option at the moment. The platform also has an internal YFI token - all the tools that the user enters are converted into it. In this way, the balance is adjusted to optimize the contribution.

Conclusion

Today we are seeing a really amazing phenomenon: the first flexible and transparent financial structure is emerging. The main problem of the traditional banking structure has been solved - all financial instruments are out of control of censorship and total control. The risks of working with DeFi, of course, are. This is the vulnerability of smart contracts, and financial risks, and vulnerability on the side of users, that is security risks. A separate risk can be called update risks: most DeFi projects are managed using DAO, which means it is managed by all token holders. Accordingly, voting may be on the majority side and may not coincide with the interests of the user. However, despite these risks, there are many more advantages: anonymity, lack of verifications, the speed of transactions, which is several times higher than banking, full control of your own funds and open source code, which allows you to create more projects. Based on this, we personally believe that traditional banking applications will soon leave our everyday life. Of course, if they fail to adapt to changing realities.



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