We know that the DeFi market has hit the $20 billion total value locked (TVL), according to DeFi Pulse, and this is only expected to increase throughout the coming years. But what is DeFi, and why is it becoming so popular in the crypto space?
DeFi (Decentralized Finance) is based on blockchain technology. It enables a peer-to-peer financial network where financial services such as trading, lending, investment, wealth management, payment, and insurance are decentralized through trustless and transparent protocols that run without intermediaries.
To understand the real dimensions of DeFi and why it matters, we must first look at its origins and how it differentiates from traditional financial services. The term DeFi first appeared in a Telegram chat in August 2018 of ETH developers and entrepreneurs when discussing what to call the movement of open financial applications being built on Ethereum, to open up traditional financial services to everyone by providing a permissionless financial service ecosystem built on blockchain infrastructure.
DeFi Landscape Source: The Block
The origins of DeFi
While DeFi draws on the same blockchain technology that gave birth to Bitcoin and Ethereum, it did not begin simultaneously. The crucial moment for financial applications allowing users to do more with their money than transferring from one person to another came about with MakerDAO in 2017.
MakerDAO introduced the Dai stable coin and allowed users to issue a cryptocurrency that´s pegged at 1-to-1 to the value of the U.S. dollar through the use of digital assets as collateral. DeFi is not merely a short for decentralized finance. In fact, its wording conveys a much deeper message as it comes out as DEFY (pointed out by Blake Henderson of 0x, who participated in the Telegram chat of August 2018). This revolutionary movement offers a strong value proposition whereby individuals and institutions use broader access to financial applications without the need for a trusted intermediary, such as traditional custodial banks, thus defying the current status quo.
Source: Coinmarketcap.com
The financial system is the backbone of the world´s economies. Nonetheless, traditional financial systems have major issues and are subject to abuse and incapabilities linked to credit risk, lack of transparency, and unequal access. For example, The World Bank estimates that over 1.7 billion people worldwide do not have access to bank accounts or financial institutions of any type.
Understanding DeFi
DeFi, or decentralized finance, is a new way of handling finances that is powered by blockchain technology. Just like with any other financial system, there are some risks associated with using DeFi protocols. These risks include loss of principal, counterparty risk, and liquidity risk. However, there are also some specific risks associated with DeFi, such as smart contract vulnerabilities and flash loan attacks. In general, the issues with DeFi can be divided into two main categories: vulnerability and user-experience issues. For example, one of the major problems is smart contract vulnerability and exploited errors, which can lead to incorrect codes and an unintended loss of funds.
Most DeFi projects run on the Ethereum network because it supports smart contracts. This allows for the creation of decentralized applications (dApps) that go beyond traditional transactions. DeFi applications come in different forms, including innovative cryptocurrency trading algorithms, derivatives trading, margin trading, money transfers, and lending markets.
Core attributes
Non-custodial: means that people using it have control over their money and the value to be transferred from one person to another without financial institutions’ need.
Open: meaning that these networks are global and borderless (everyone can access it like the internet).
Transparent: the code of these financial applications is available and open for anyone to see, meaning anyone can track exactly where their money or valuables are.
Composable: It is open-source, and so other developers can build upon it, enhancing innovation and adding value with new applications being built.
Decentralized: public blockchains (Ethereum) are powered by thousands of nodes-computers running the blockchain´s software worldwide, making it very hard to censor, tamper with or eliminate them.
The Origins of DeFi
While DeFi draws on the same blockchain technology that gave birth to Bitcoin and Ethereum, it did not begin simultaneously. The crucial moment for financial applications allowing users to do more with their money than transferring from one person to another came about with MakerDAO in 2017.
MakerDAO introduced the Dai stable coin and allowed users to issue a cryptocurrency that´s pegged at 1-to-1 to the value of the U.S. dollar through the use of digital assets as collateral. DeFi is not merely a short for decentralized finance. In fact, its wording conveys a much deeper message as it comes out as DEFY (pointed out by Blake Henderson of 0x, who participated in the Telegram chat of August 2018). This revolutionary movement offers a strong value proposition whereby individuals and institutions use broader access to financial applications without the need for a trusted intermediary, such as traditional custodial banks, thus defying the current status quo.
The financial system is the backbone of the world´s economies. Nonetheless, traditional financial systems have major issues and are subject to abuse and incapabilities linked to credit risk, lack of transparency, and unequal access. For example, The World Bank estimates that over 1.7 billion people worldwide do not have access to bank accounts or financial institutions of any type.
DeFi, on the contrary, offers a revolutionary alternative that is inclusive, puts people in charge of their money/assets, and is centered around trust and transparency with mostly open-source code.
ARYZE and DeFi
The traditional financial system fails to keep up with the pace of the digital age. For example, cross-border transactions take too long (an average of 3 days) and cost approximately 6.8 % in fees. ARYZE’s goal is to reduce the costs of international money transfers to near-zero by building a full-reserve solution using regulated cloud-native banking software, interlinked with the world of blockchains and smart contracts.
Next-generation DeFi or distributed finance solutions require assets that are not extremely volatile, and that is where interoperability comes into play. Whenever users use Digital Cash on-chain or transfer money from MAMA to MAMA, ARYZE collateralizes with assets backed by government guarantees. We’re insuring working towards drastically reducing credit risk by placing user funds into central-banks deposits or through the purchase of short-term government bills and bonds.
When money becomes fully digital, it can enable endless opportunities for creation, customization, and adaptation. ARYZE Digital Cash can be used across DeFi protocols in a number of ways. For example, it can be used to collateralize loans, trade on decentralized exchanges, or make peer-to-peer payments. Additionally, Digital Cash can be integrated with other protocols to provide liquidity or to help facilitate trades.
To learn more about ARYZE, crypto, blockchain, and tokenization, check out our blog or visit our website. If you liked this article please comment and share it with your network.
