The promise of cryptocurrency is that money and payments are widely available - for everyone, no matter where they are. Decentralized traffic (DeFi) or Open Finance goes a step further. Imagine a global, open alternative to all the financial services you currently use - savings, loans, transactions, insurance and more - available to anyone in the world via a smartphone and internet connection.
This is now possible on smart contract blockchains such as Ethereum. "Smart contracts" are programs running in the blockchain system, which can be started automatically after meeting certain conditions. These intelligent contracts allow developers to create far more advanced functions than sending and receiving cryptocurrency. We now call these programs decentralized applications or apps. You can think of dapp as an application based on decentralized technology, and not about the construction and control of one centralized entity or company. (Get used to this word, honey, you'll see him often from now on.) While some of these concepts may sound futuristic - automated loans negotiated directly between two strangers in different parts of the world, with no bank inside - many of these dapps are already available today. There are dappy DeFi that allow you to create stableco coins (cryptocurrencies whose value is related to the US dollar), borrow money and earn money on your crypto, take a loan, exchange one resource for another, go for long or short assets and implement automated, advanced strategies investment.
** What distinguishes these DeFi Dapps from their traditional counterparts at the bank or on Wall Street? **
- The institution and its staff do not manage the core business of these companies - instead, the rules are enshrined in a code (or smart contract, as mentioned above). After implementing a smart contract in blockchain, DeFi dappy can work alone with little or no human intervention (although in practice developers often maintain dappy with updates or bug fixes).
- ** The code is transparent ** on the blockchain for everyone to test. This builds a different kind of user trust because everyone has the ability to understand the functionality of the contract or find errors. All transactional activities are also public for anyone to view. Although this may raise privacy questions, transactions are pseudonymous by default, i.e. they are not directly related to your true identity.
- Dapps are designed to be ** global from day one ** - Whether you're in Texas or Tanzania, you have access to the same DeFi services and networks. Of course, local regulations may apply, but technically most DeFi applications are available to anyone with an internet connection.
- "Without permission" to create, "without permission" to participate - anyone can create DeFi applications and anyone can use them. Unlike today's finance, there are no guards or long-form accounts. Users interact directly with intelligent contracts from their cryptographic wallets.
- Flexible user experience - do you not like the interface to a certain dapp? No problem - you can use a third-party interface or build your own. Smart contracts are like an open API for which anyone can build an application.
- Interoperability - new DeFi applications can be built or composed by combining other DeFi products, such as Lego blocks - e.g. stableco coins, decentralized exchanges and forecast markets can be combined to create completely new products.
DeFi is currently one of the fastest growing sectors in cryptography. Industry observers measure adhesion using a unique new metric - 'ETH blocked in DeFi'. At the time of writing, users deposited cryptocurrencies worth over $ 600 million for these smart contracts.
Intrigued? Let's take a closer look at some of the popular DeFi dapps that you can try today. To connect to these dapps, you will need a cryptocurrency wallet with a built-in dapp browser (e.g. Coinbase Wallet). You can also use most of these applications on your computer by selecting Coinbase Wallet and scanning the QR code.
There are still early days for dapps, so DeFi users should research new products and services. Like any computer code, intelligent contracts can be prone to both unintentional programming errors and malicious hacker attacks.
** Stablecoin and a decentralized reserve bank: MakerDAO ** Maker is a stablecoin project in which each stablecoin (called DAI) is assigned to a US dollar and is secured by a crypto security. Stablecoins offer programmability of cryptocurrencies without adversely affecting the variability that can be seen in "traditional" cryptocurrencies, such as Bitcoin or Ethereum. You can try to create your own stablecoin DAI in the Maker Oasis application. However, Maker is more than a stablecoin project - it aspires to be a decentralized reserve bank. People who own a separate but related token, MKR, can vote on important decisions, such as the Stability Fee (as well as the Federal Reserve's Open Market Federal Committee vote on the Fed Funds Rate). Another stablecoin with a different architecture is USD Coin (USDC), where each USDC token is secured by one US dollar stored on the audited bank account.
** Borrow and loan: Relationship ** Compound is a blockchain based loan system - you can borrow your crypto and earn interest on it. Or maybe you need money to pay rent or buy groceries, but your funds are related to investments in crypto? You can deposit your crypto on the smart Compound contract as collateral and borrow from it. A complex contract automatically matches borrowers and lenders and dynamically adjusts interest rates based on supply and demand. Other popular dappy loans are Dharma and dYdX. Aggregators such as LoanScan track the interest rates on loans / loans in various dapps, so you can look around for the best interest rates. Automated Token Exchange: Uniswap Uniswap is a cryptocurrency exchange operated solely on smart contracts, allowing you to trade popular tokens directly from your wallet. This is different from an exchange, such as Coinbase, which stores your crypto for you and stores your private storage keys. Uniswap uses an innovative mechanism known as Automated Market Making to automatically settle transactions near market prices. In addition to trading, any user can become a liquidity provider, providing a crypto to the Uniswap agreement and earning some exchange fees. This is called "connecting". Other popular decentralized exchange (DEX) platforms are 0x, AirSwap, Bancor, Kyber, IDEX, Paradex and Radar Relay. They all have a slightly different architecture.
** Forecast markets: August ** Augur is a decentralized forecast market protocol. Thanks to Augur, you can vote for the outcome of events, except that you put a "skin in the game" by assigning a value to your vote. Forecast market platforms such as Augur and Guesser are emerging, but offer a future view where users can make better predictions using the wisdom of the crowd. Synthetic assets: Synthetix Synthetix is a platform that allows users to create and exchange synthetic versions of assets such as gold, silver, cryptocurrencies and traditional currencies such as the euro. Synthetic assets are secured by an excess of collateral blocked in Synthetix contracts.
** Savings games without losses: PoolTogether ** DeFi compatibility is suitable for endless new possibilities. PoolTogether is a no-loss game in which participants deposit stablecoin DAI into a shared pool. At the end of each month, one lucky participant wins all accrued interest and all recover their initial deposits.
** What's next with DeFi? ** Money and finance have existed in one form or another since the dawn of human civilization. Crypto is the latest digital avatar. In the coming years, we can see that every financial service we use in today's fiat system will be rebuilt for the cryptographic ecosystem. We have already seen issues and exchanges of assets, borrowing, loans, storage and derivatives built for cryptography. What's next? The first generation of DeFi Dapps relies heavily on security. This means that you must already own a crypto and provide it as collateral to borrow more crypto. More traditional unsecured loans and borrowings will have to rely on an identity system so that borrowers can accumulate loans and increase borrowing power, just like today's SSN and FICO results. Unlike today's identity and credit systems, however, decentralized identity will need to be both universal and protect privacy.
We also observe innovations in the area of insurance. Many DeFi loans today are overly secured (which means that loans appear inherently secure due to the generous cushion of assets held in reserve). But the black swan for DeFi are weak points in smart contracts. If a hacker finds and exploits an error in the open source code for dapp, millions of dollars can be exhausted immediately. Teams such as Nexus Mutual are building decentralized insurance that would provide users with security for intelligent contract hacks.
Another trend we see is a better user experience. The first generation of dapps was built by blockchain enthusiasts for blockchain enthusiasts. These dapps did a great job, showing new exciting DeFi capabilities, but usability left something to be desired. The latest versions of the DeFi app prioritize design and ease of use to share open finances with a wider audience. In the future, we expect cryptocurrency wallets to be a portal to all activities related to digital resources, just like today's web browser is a portal for news and information from around the world. Imagine a desktop that shows not only your assets, but also the number of open funding closed in various protocols - loans, pool and insurance contracts.
In the entire DeFi ecosystem, we also observe a move towards decentralization of management and decision making. Despite the word "decentralized" in DeFi, many projects today have primary keys for programmers to turn dapps on or off. This was done to allow easy updating and to provide an emergency shut-off valve in case of incorrect code. However, as code gets more and more tested in battle, we expect developers to opt out of backdoor switches. The DeFi community is experimenting with ways to enable stakeholders to vote on decisions, including through the use of decentralized autonomous blockchain-based organizations. Something magical is happening in the open financial system - cryptocurrencies bring money online, and we see a huge leap when it comes to the functionality of money. This is a rare opportunity to see a completely new industry from scratch. The DeFi space will initially keep up with today's financial services industry. But over time, it's hard to even fathom what innovations will be when the power to create financial services is democratized for anyone who can write code.
** More resources ** If you want to dive deeper into DeFiol Rabbit, here's a list of resources that you may find useful [DeFi Pulse] (https://defipulse.com/) [DeFi Prime] (https://defiprime.com/) [Introducing USDC] (https://www.coinbase.com/usdc) [Stablecoin statistics] (https://stablecoinstats.com/)
All images provided in this document are from Coinbase.