The original idea that Satoshi Nakamoto had behind Bitcoin was to create a decentralised and accessible alternative to traditional money. According to Gallup research, nearly 70% of the US millennials, i.e. people in the age between 39 and 25, do not own a credit card. This alarming trend signifies that traditional payment systems are losing their popularity and are giving way to more innovative solutions. The best evidence for this trend is the success of the Decentralised Finance (DeFi) sector, also known as Open Finance.
In this article, Safello will explain what decentralised finance is about and what are the most promising applications within this flourishing ecosystem.
What is Decentralised Finance (DeFi)?
Decentralised Finance refers to peer-to-peer financial applications powered by decentralised architectures, such as blockchain technology. In a broader (or rather philosophical) sense, it stands for a global transformation of the traditional financial sector, including real estate, consumer finance, banking, investments, insurance, and many others. Decentralised finance aims to build transparent and open-source financial services which can be accessed by anyone through decentralised applications (dApps) and does not need intermediaries or central authorities to carry out operations.
In 2020, this newly established sector has seen an unprecedented 1120% increase in total value locked, which grew from almost $700 million in January to $8.2 billion in September. Numerous projects - from decentralised lending services to options trading platforms, were launched within the DeFi ecosystem. As we have explained in our previous article on dApps, finance applications and decentralized exchanges attract the highest number of active dApps users. As a result, this newly emerged sector accounts to 84% of the total Ethereum dApp volume.
No wonder in 2020 DeFi became the most actively developing sector within the blockchain industry and continues to grow.
DeFi key benefits
DeFi has several benefits over the current financial sector. First of all, its applications are available to a broader group of people, including those who do not have access to the traditional financial services, such as banking, investments, credit cards, etc. Additionally, decentralised finance has a great growth potential due to the innovative technology behind it. In the future, DeFi can introduce a new level of financial services, markets and products which are not restricted by central institutions and regulations. The other benefits of DeFi include:
- No intermediaries. Due to its decentralised character, DeFi has eliminated the role of intermediaries, arbitrators and centralised financial authorities, which means that users can independently control and manage their funds and private information at all times.
- Enhanced security. DeFi applications are secure and invulnerable thanks to the use of blockchain technology. What is more, they are considered to be unhackable, since all private information is encrypted and distributed among different sources.
- Flexibility and stability. DeFi apps can be easily accessed and managed by users without involving third parties. Moreover, such dApps are free of censorship and fully transparent, which is an important criteria when it comes to applications dealing with finance and banking.
DeFi Use Cases
Decentralised exchanges (DEX) and marketplaces
This category is arguably the most innovative segment within Decentralised Finance, with projects that enable the creation of financial securities, crypto synthetic assets, exchange-traded markets, and many more. Decentralised Exchanges, or DEXes, are the most well-known DeFi applications within this category. DEXes allow users to conduct cryptocurrency-related operations without involving organized marketplaces, such as exchanges, to hold their digital currencies. Thus, users use smart contracts to trade directly between each other’s digital wallets. What is more, DEXes have relatively low trading fees.
Decentralised marketplaces include platforms that provide ownership of a variety of traditional financial tools. Such decentralised applications are designed to remove custodians as well as make the process more secure and transparent due to the eliminated single point of failure. Many decentralised platforms offer security tokenization services, which provide different instruments and means to launch blockchain-based tokenized securities.
Many DeFi projects focus on providing decentralised banking services, such as issuing loan agreements, allowances or stablecoins. The latter is a relatively new concept within the cryptocurrency field, which refers to a digital coin that is deliberately connected to a real-world asset. Unlike other cryptocurrencies, it does not fluctuate and can be used as decentralised digital cash. Decentralised mortgage loan solutions are also very popular within DeFi due to their fast processing times and low costs, because smart contracts significantly reduce costs related to underwriting, legal assistance, risk evaluation etc. Blockchain-based insurances and loans are also a well-recognized branch in the DeFi space. Decentralised insurances make the whole registration process faster, cheaper and more effective.
Decentralised lending services
Open-source credit solutions have a great potential to transform the traditional credit management system thanks to blockchain technology and cryptographic verification which enhances trust and reliability of the whole system. DeFi lending services offer faster (if not instant) transaction clearance and settlement, eliminate credit search and give the possibility to involve various digital assets.
Best DeFi applications
There are numerous decentralised applications in the DeFi sector. In this article, we only cover four great platforms selected by the Safello team. If you are interested in reviewing more projects, we suggest you check DeFipulse and dAppradar websites which list all DeFi projects.
Uniswap is one of the most successful decentralised exchanges (DEX) built on the Ethereum platform. Automated liquidity provision enables Uniswap to exchange ERC20 crypto tokens without counting on users providing sufficient liquidity. Uniswap charges extremely low fees (0.3%) and does not involve third parties which makes it a very attractive option for those who want to swap ERC20 tokens. The platform enables traders, programmers and liquidity providers to engage in an open and transparent marketplace.
After Vitalik Buterin proposed the idea of a decentralised exchange (DEX) in 2016, Hayden Adams decided to turn Buterin’s idea into a functional platform in the coming years. Supported by the Ethereum Foundation, Uniswap was launched in late 2018 and quickly became recognized among traders and investors. Nowadays, Uniswap has a great liquidity and growing volumes which makes it one of the most popular DeFi applications in the market.
Launched by Blake Henderson from 0x, Brendan Forster from Dharma, and Inje Yeo in 2018, TokenSets is a decentralised platform which helps users to manage their digital funds and balance their crypto portfolios with the effective asset management strategies. Once registered, users can choose from a variety of trading sets. For example, they can follow well-established traders’ strategies by choosing “Social trading sets” or allow artificial intelligence and machine learning to design the most profitable crypto strategy in the “Robo sets” section. What is more, the Tokensets platform (Set V2) is fully audited and offers flexible portfolios to hold different coins and adjust their positions according to the preferred strategy.
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Celsius Network is a borrowing and lending platform, which aims to "unbank" the population and offers a more effective alternative to the traditional banking - the one inspired by blockchain and cryptocurrencies. At the moment, the platform only allows borrowing and lending for Bitcoin and 30 most popular cryptocurrencies. It also plans to introduce support for tokenized commodities, such as tokenized gold, in the near future. The official Celsius website reports more than $1,596,058,805 in assets under management which is more than 100% growth since February 2020.
Additionally, the platform shares 80% of the revenue with its users which allows them to gain up to 23% APY paid out weekly. As of June 2020, the platform has successfully finished a new equity funding round with a $20 000 000 raise and more than 1000 participating users, which makes it one of the most rapidly developing projects in the DeFi sector.
Yearn.Finance is a decentralized platform which aims to become a leading gateway to yield-generating services. The platform has broken into the DeFi space in summer 2020 and currently amounts to over $660 000 000 worth of digital assets staked in Yearn. Designed primarily for experienced traders and investors, Yearn.Finance offers a variety of services available on the platform in categories Vaults, Earn, Zap (connects users with Zapper.fi which facilitates with starting complex positions), APR (enables users to see the profit from depositing different crypto assets into different projects) and Cover (connects users with Nexus Mutual which allows investors to hedge risk on Yearn).
Launched in 2017, BlockFi is a non-bank DeFi platfrom which offers lending services to cryptocurrency users who collaterize the loan in USD with their digital assets. This blockchain-based platform aims to provide transparency, liquidity and fairness to the markets by developing innovative digital finance products and solutions. BlockFi stores users' BTC and ETH with a verified custodian and issues the USD loans to the bank accounts.
To sum up
With a growing number of successful applications which have a potential to disrupt the traditional finance, banking, lending, and many others it’s no wonder that DeFi became the most actively developing sector within the blockchain industry and continues to grow in 2020. At the same time, considering that centralised and decentralised systems have their benefits and detriments, it is likely that both of them will co-exist within the financial framework in the future.
P.S. Safello does not give financial advice or speculate on outcomes. Traders independently choose the DeFi platforms at their own risk.