Ethereum's Decentralized Finance (DeFi): What's next for finance?
Decentralized Money, or "DeFi" for short, has taken the crypto and blockchain world by storm. However, its recent resurgence obscures its origins from the 2017 bubble era. While everyone was participating in an "Initial Coin Offering," also known as an "ICO," very few businesses recognized the blockchain's potential for much more than a brief price increase. These pioneers envisioned a world in which financial applications, such as insurance, trading, savings, and banking, could all be performed directly on the blockchain without the need for middlemen.
Imagine having access to a savings account that yields 10% annually in USD without a bank and virtually no risk of funds in order to comprehend the potential of this revolution. It's possible to trade crop insurance with a farmer in Ghana from your Tokyo office. Imagine being able to create markets and earning fees in the form of percentages—something that every Citadel would want. Isn't it tempting to believe? It's not. The future is here now.
The fundamental components of DeFi Before we proceed, you should be aware of the following:
Robotized market making or trading one resource for another trustlessly without a delegate or clearinghouse.
Overcollateralized lending or the ability for traders, speculators, and long-term holders to "put your assets to use"
Stablecoins or algorithmic resources that track the cost of a basic without being brought together or upheld by actual resources.
Understanding how DeFi is made Stablecoins are used a lot in DeFi because they look like traditional fiat currencies like the US dollar. This is significant because the history of cryptocurrency demonstrates how volatile things can be. Stablecoins like DAI are designed to track the value of the US dollar with only minor deviations even during strong bear markets, such as the 2018-2020 bear market.
Stablecoin-based lending protocols are an intriguing new development. Imagine being able to lock up a million dollars' worth of assets and then borrowing against those assets in stablecoins. When your collateral is no longer sufficient, the protocol will automatically sell your assets in the event that you fail to repay the loan.
The entire DeFi ecosystem rests on automated market makers. You'll have to rely on your broker, clearinghouse, or exchange to trust you in the legacy financial system without this. You can trade one asset for another using a reserve of both assets in the pools of automated market makers, or AMMs for short. External arbitrageurs are the ones who discover prices. Based on other people's assets, liquidity is pooled, and trading fees are available to them.
In the Ethereum ecosystem, you can now gain exposure to a wide range of assets without ever having to interact with the conventional financial world. Lending assets or being a market maker are two ways to make money.
This is an amazing development for the developing world because it gives them access to all of the financial systems in the developed world without any barriers to entry.