Weekly SmartPills #25
THE REVOLUTION BETWEEN CEFI AND DEFI
Decentralized finance (DeFi) is a blockchain-based financial system that eliminates the need for centralized intermediaries such as banks, financial institutions and governments. Instead, DeFi uses smart contracts to automate financial transactions and facilitate interaction between users. It first originated on ethereum and then expanded to other blockchains.
The constituent element of DeFi are DApps, which are a set of smart contracts that work in unison to process requests from traders and users. DApps can be of different types and each performs particular tasks. For example, one type of DApp is a DEX such as uniswap. There will be as many smart contracts as there are liquidity pools, then there will be some smart contracts whose function is to interact with oracles to make offchain information of a particular asset, etc…
DeFi vs CeFi
The main difference between DeFi and CeFi is centralization. CeFi is a traditional financial system in which centralized financial institutions control users' financial activities. DeFi, on the other hand, is a decentralized financial system in which users have full control over their own financial activities through internal Protocol Governance.
Some other differences between DeFi and CeFi include:
Accessibility: deFi is more accessible than CeFi, as it does not require opening an account with a financial institution. Thus, deFi has no barriers to entry,all that is needed is a trivial internet connection.
Open System: The DeFi system is opensource, which brings a more dynamic development and especially better developers ready to challenge themselves.
Transparency: DeFi is more transparent than CeFi, as the financial data is publicly available on the blockchain.
Efficiency: DeFi is more efficient than CeFi because smart contracts can automate financial transactions.
Speed: DeFi is fast and always evolving, traditional finance much more resistant to change.
Censorship: no censorship is possible within Defi.
There are several DeFi protocols that offer a variety of services financial services, including:
Decentralized exchanges (DEX): allow users to exchange cryptocurrencies without the intermediation of a centralized exchange. These are made possible by liquidity pools into which users deposit assets to stop yield farming ( i.e., earn an interest rate on their deposits) and by oracles whose role is to bring data present offchain into the DEX ( e.g., the price of an asset).
UNISWAP - QUICKSWAP - SUSHISWAP - BALANCER - VVSFINANCE -OSMOSIS
Lending and Borrowing Protocols (Lending and Borrowing): allow users to lend and borrow cryptocurrency.
Minting stablecoin: I deposit collateral and am disbursed a stablecoin that does not come from a Lending, but is created by the platform itself.
Yield farming protocols (Yield Farming): allow users to earn interest on cryptocurrencies deposited in a pool of liquidity.
Insurance protocols: allow users to purchase insurance against financial losses.
Staking protocols: allow users to earn interest on cryptocurrencies by locking them on the blockchain.
Liquid staking: staking by maintaining liquidity through the creation of a liquid derivative.
Margin Trading: Trading with borrowed assets, hence with leverage. It is thus the combination of DEX + LENDING/BORROWING.
Asset management: easy investing solution. In short someone to do it for me
Derivatives and synthetics: assets that track the performance of an underlying asset SINTETIX - MIRROR PROTOCOL
There are several metrics used to measure the success of DeFi, including:
Total Value Locked (TVL): indicates the total value of cryptocurrencies locked in DeFi protocols.
Number of Unique Active Wallets (NUAW): indicates the number of unique wallets that have interacted with DeFi protocols.
Number of Transactions (NTX): indicates the number of transactions that have been executed on the DeFi protocols.
DeFi is an emerging industry that is rapidly growing in popularity. It offers a number of advantages over the traditional financial system, including accessibility, transparency and efficiency. However, DeFi also presents some risks, including the volatility of cryptocurrencies and vulnerability to cyber attacks.
DeFi has the potential to revolutionize the traditional financial system. In the future, it is possible that DeFi could be used to offer a wider range of financial services, including investments, loans, and insurance. In addition, DeFi could be used to create new financial business models, such as inclusive finance and sustainable finance.