Smart contracts for ICOs made a splash in their time. For a long time, this method of collecting money remained the main advantage of the blockchain. The main one, but not the only one. Now a new revolution is starting called decentralized finance
Last spring, the American magazine Forbes called the DeFi sector "a new dynamic that revitalized the cryptocurrency industry." Decentralized finance really became a trend in 2019 and still continues to gain momentum in popularity.
DeFi is financial instruments in the form of services and applications built on the blockchain. The main task of decentralized finance is to become an alternative to the banking sector and replace the traditional technologies of the current financial system with open source protocols. That is, open access to decentralized lending and new investment platforms for a large number of people. And let them receive passive income from cryptocurrency assets, as well as save on fees for transfers, loans and deposits.
Most of the existing DeFi are built on the Ethereum blockchain and the number of new applications in the field of decentralized finance is growing steadily. So, in early February, the number of Ethereum blocked on smart contracts for DeFi applications reached $ 938, according to the defipulse.com portal.
Perhaps the most famous project in the field of decentralized finance is MakerDAO, a decentralized lending protocol. More than half of the blocked airtime falls on this platform. The project has quite a lot of functionality, but the main advantage is the presence of a special type of smart contracts called “Collateralized Debt Positions”.
With the help of them, each user can send a certain amount of ETH to a smart contract and issue his own token, backed by the second most important cryptocurrency. At the same time, the generated DAI tokens are, in fact, a collateralized debt to MakerDAO. The platform acts as a kind of bank, but absolutely any user can take out a loan from this bank. Borrowed funds are often used by clients of DeFi services to fill liquidity gaps, as an alternative to expensive bank money.
Other most famous credit and deposit platforms are InstaDApp, BlockFi, Compound. The latter allows not only taking loans, but also investing cryptocurrency at 6% per annum. And BlockFi clients can borrow digital assets according to their usual credit schemes: credit checks or intermediaries.
Decentralized finance also includes platforms for issuing share tokens such as Polymath and Harbor; exchange protocols – Uniswap or Bancor, which allow you to instantly convert one cryptocurrency to another; forecast services such as Augur; digital asset management platforms such as Melonport and others.
Advantages and Disadvantages of DeFi Applications
Despite the fact that the decentralized application sector is just developing, there are already quite a few benefits. The main thing is that any user can get one or another financial service, for example, lending, bypassing the bank. Decentralized landing protocols minimize risks and open access to borrowed funds 24/7. New products are especially relevant for borrowers from countries with expensive bank loans.
The procedure for creating your own digital asset and bringing it to the market has become noticeably easier and has become available to almost everyone. Payment processing does not last for several days, but a maximum of a couple of hours, interest rates and commissions have become much lower. Also, users have new ways to make money on cryptocurrency.
For developers, the simplicity of creating applications becomes a clear advantage due to transparency and open source, in addition, projects in the decentralized finance sector can be developed on any platform that interacts with smart contracts.
However, it is possible that in times of high volatility, DeFi users will have to pay higher fees to fulfill the necessary obligations to the services on time, which in turn can lead to a sharp increase in fees on the Ethereum network. So, at the end of November last year, the amount of Ethereum fees in some blocks exceeded $ 30. This happened against the background of the activation of the "complexity bomb" in the blockchain. Then, analysts argued that a similar situation could be caused by products in the field of decentralized finance (DeFI). A sharp drop in the cryptocurrency rate from $ 185 to $ 145 led to the liquidation of credit positions.
Therefore, despite the rapid development of a relatively new area in the digital industry and the emergence of an increasing number of decentralized finance services, one should not forget about factors such as volatility and high credit risk.