For those of you that have seen the phrase DeFi being touted around on social media and crypto news reports, you may be wondering whether you are missing out on a new trend or whether the complexity of DeFi is something you can let pass you by for the moment?
It just so happens that in this instance if you do not already know what DeFi is, you could be missing out because DeFi is being labelled as the next red hot crypto real estate!
Not only is it one of the fastest growing sectors in blockchain tech, but this mystery financial orientated blockchain market is showing remarkable promise on not one but two levels.
1. DeFi blockchain ecosystems are incredibly useful in the world of finance so much so that mass adoption is highly likely
2. DeFi based cryptocurrencies are also showing promise from a crypto investment point of view as their market capitalisation values begin to rise
To confirm point number 2 – cryptos such as LEND, mentioned in our ‘Top 10 Cryptocurrencies To Buy In 2020’ report, rose a remarkable 2500% in value this year. To put this into perspective, investors that put in just $100 into LEND at the beginning of the year have turned their investment into $2,750.
As with most things within the world of cryptocurrencies, we all know that anything ‘new’ that starts to make its way into mainstream media reports is well worth looking into.
Although it is still early days for DeFi, it does look like a concept that stands a realistic chance of becoming something enormously popular in the future. As with anything within the world of cryptos, there is always a risk and the idea of this report is to give you a starting point, so you know what’s coming!
What is DeFi?
DeFi is short for ‘Decentralised Finance’ or ‘Open Finance’. It is a new age virtual financial world that uses automation to set up and manage financial smart contracts without the need for a middleman.
This could be to negotiate terms when structuring derivative products, buying/selling securities, creating savings plans, trading stocks, getting loans, arranging finance deals, or taking out insurance. Once terms are agreed upon, the smart contract is set up with no banks involved.
The smart contracts in question are stored on a decentralised open-source blockchain ecosystem, much like Ethereum which is a smart contract-based network, thus creating binding and immutable finance deals/contracts that are completely transparent due to their blockchain roots.
To connect to these blockchain ecosystems and set up contracts requires all parties involved to use dapps a.k.a. decentralised apps, and at this point, this is where DeFi meets dapps!
Two people or parties, or multiple people/parties, situated anywhere in the world will need to use the same dapp connected to the same blockchain ecosystem to set up their financial-based smart contract deal which then must be honoured for the contract to close.
What’s more, is that the entire contract is automated. Person A owns the contract, while person B needs to satisfy the terms set. Person B must meet milestones and the smart contract acknowledges that the terms of the milestone are met. Meanwhile, person A has no control or authority to change the terms without Person B’s approval and neither party can manipulate the contract.
It is amazingly simple:
· DeFi smart contract is set up between independent parties
· Terms of the contract must be satisfied to close it
· Any changes must be agreed by both parties
What is the Difference Between Defi and a Defi Ecosystem?
Now at this point, it is important to remember that there is no one ecosystem or network called DeFi as such. You may hear the term ‘DeFi Ecosystem’ being thrown around as if it was an actual blockchain app or brand but what this is referring to is the collective build-up of all the different DeFi ecosystems within this niche.
Put another way, DeFi describes the ecosystems and the use of smart contracts used for financial deals that would normally involve a financial institution, yet DeFi networks cut out the need for a third-party.
As such, DeFi is more like a niche within the world of cryptos and blockchain tech. This niche is made up of the people that use Defi ecosystems to set up smart contracts and the numerous DeFi ecosystems with dapps that allow people to use their network to set up smart contracts – for example LEND is a DeFi ecosystem.
· DeFi is a cryptocurrency and/or blockchain niche
· There are more than 20 DeFi ecosystems within this niche
· Thousands of people use DeFi ecosystems to set up smart contracts
· Currently, $8 billion is locked in smart contracts from various DeFi ecosystems
DeFi Loans and Finance Deals
Currently, one of the most popular everyday uses for DeFi networks is arranging ‘loans’ and ‘finance deals’. You can either be the person lending the money or the person applying for a loan or finance.
If you are applying for a loan or finance, then you can do this without the need for a bank or any other financial institution but in nearly every case you will need to have digital assets that you can use as collateral, which is largely the reason why you can get these types of loans without the need for a financial background check.
Loans can be negotiated between 2 parties using a dapp to set up the contract. Alternatively, you could opt to use existing smart contracts that offer loans with no need for any negotiations. In this case, you would take a loan directly from an open smart contract. The terms of the loan are already set on the network so all you would need to do is activate the smart contract to get your loan.
As for interest rates, complex algorithms make calculations to ensure the smart contract does not undersell itself while in addition to this there are also fixed interest rates for more straightforward loan types.
Consequently, this new tech allows you to get a ‘cash loan’ or ‘finance for a car’ without going to a bank or a lending company. You can go to a DeFi blockchain ecosystem, download the dapp, and get your loan with ease. Furthermore, mortgages are also being set up using the very same smart contracts
Here is an example of a finance deal where you would use your crypto as collateral:
1. Put your collateral inside the smart contract
2. Take the interest rate given
3. Receive a fiat currency loan in your bank account
4. Pay the borrowed amount back
5. Smart contract will return your collateral
How Does the Volatility of the Crypto Market Affect DeFi?
People that use DeFi blockchain ecosystems to set up financial deals need stability because dishing out loans using crypto can be quite risky due to the volatility of cryptos such as BTC and LTC.
As a result, most DeFi blockchains incorporate the use of stable coins which is what makes DeFi as a whole work. Stablecoins have the luxury of being secured against fiat currencies such as the US$. Most notably, USDT is one of the most common stable coins out there and it is also used here on mBitcasino.
In the case of a loan, the lender could provide the crypto in USDT and require that the person that took the loan pay it back using USDT. With minimal swings in value, USDT and other stable coins make lending much less of a risk.
For other financial transactions, USDT maybe the crypto used to determine the value of a digital asset while it is in transit from person A to person B. As the transition occurs, USDT’s low volatility means there is little risk of losing value as it is converted from fiat to USDT and then back fiat at the other end. For instance, if a US$1 million securities transaction is being made using BTC and then BTC drops 5% in an hour, this is a US$50,000 loss!
What Challenges Do DeFi networks Currently Face?
Although there are a huge number of people that use DeFi apps and networks with US$8 billion currently tied up in smart contracts, there are still some challenges ahead before mass adoption.
Non-Tech-Savvy Adopters: At the moment only those confident with using this tech are using it. Early adopters with a technical mind while non-techies or those that do not like to take risks will still be deterred from DeFi. As many people still have a problem with investing in cryptocurrencies themselves, DeFi is a whole new ball game when it comes it blockchain adoption.
Slow Networks: The DeFi networks are notoriously slow. This is due to the many apps that have been built on top of their ecosystems. Keep your eyes peeled for any DeFi ecosystem that begins to advertise super fast transaction speeds because this would be a huge leap forward for the brand that gets there first.
High Risk of Error: As with cryptos in which you can lose it all by typing in the wrong public key, there is also the chance that smart contract is incorrectly set up with the wrong terms. Reducing the risk of error is something DeFi ecosystem designers will need to look into because in some cases there are thousands and sometimes millions at risk.
What Are The Different DeFi Ecosystems?
Each Defi network specialises in its own field of decentralised finance. There are more than 100 projects out there split into different niche areas. Trading, lending, payments, wallets, interfaces, infrastructure, assets, scaling, analytics, education, podcasts, and more. Check out the full defi-list hereand 100+ DeFi Project list.
Here are some of the DeFi brand names from that list:
· Atomic Loans
· Compound DAO
· Request Network
Is It Worth Investing in DeFi Cryptocurrencies?
As with all cryptocurrencies, investment comes with risk. However, judging by the rise of the DeFi niche, it is worth researching some of the ICOs operating in this sphere. Look out for mass adoption, news reports, and sign up to newsletters for the projects you think look promising.
Newsletters are a great way to get a heads up about new innovative tech being released. If there is lots of social media chat and buzz around the new release making an impact for users, then it could be worth investing.
For LEND, the reason for its huge 2,500%+ upsurge was pinned in its road map and in its white paper – the release of its ‘Credit Delegation’ product. Since then the number of LEND addresses rose over 300%.
It is small clues like this that could make the difference when choosing which DeFi based cryptocurrency to invest in next!