Cryptocurrencies are tools that allow us to transfer funds or payments to any wallet across the world. On the other hand, DeFi aims to take it a step further. DeFi is not an investment tool, but a way of working or in other words, a concept. DeFi is the general name of the services, which allow us to perform any transactions in the field of traditional finance, in a decentralized way with smart contracts. The programs which we call smart contracts made it possible to have any financial services and perform any financial transactions on the Ethereum blockchain from anywhere in the world today. With the help of these contracts, developers will be able to not only transfer cryptocurrencies, but also quickly take advantage of a variety of functions, which are much more useful, low cost and advanced. DeFi applications are one of the fastest growing sectors in crypto markets today. There are many unique projects. There are many features such as earning interest in return for a certain collateral and lending/borrowing that we call “Lending”. Moreover, stablecoins, mortgage contracts, loan and insurance transactions are all made easy and low cost with DeFi. Stablecoins are crypto assets, which are created by fixing value to traditional instruments, and can be easily transferred digitally.
An Example: Two individuals, who are situated far from each other, can give or receive loans to each other without a bank or any institution between them. They do not have to know or see each other in these practices, whose conditions are predetermined in smart contracts. DeFi has made innovations in loans, savings, and other banking transactions as well as insurance and many other areas. With DeFi practices, you can get rid of the heavy paperwork and the waste of time. Since codes are transparent in the blockchain, there could be no trust issues between parties. Transactions are also confidential since they go through a cryptographic process in the blockchain.
Advantages:
You can interact with DeFi applications using crypto wallets and perform your transactions online from anywhere in the world. Anyone can create and use these applications. There are no long queues in banks, long processing times or tiring contract processes for loan or insurance applications. When you need a loan against a certain collateral, you can get it in a short time. You can access your blocked collateral later by paying the amount.
DeFi Examples:
One of the most important DeFi applications is the decentralized markets in which users keep or exchange their digital assets. These markets are called DEX, which is short for Decentralized Exchange. On these platforms, exchanges are performed directly between wallets, thanks to smart contracts.
DEX - Decentralized Exchange: Uniswap
Uniswap is a DEX, where ERC-20 tokens are exchanged instantly, in other words, a decentralized exchange. There are liquidity providers on Uniswap, and they allow other liquidity providers to exchange between ETH and other ERC-20 tokens. With the liquidation they provide, they allow other users to swap instantly. Liquidity providers are paid a certain amount during swaps. This payment is called “Liquidity Provider Fee”.
Decentralized Lending Platforms: MakerDAO, Compound
MakerDAO is one of the widely used decentralized lending platforms among DeFi platforms today. There are no lenders on MakerDAO, and the only asset to borrow is DAI. Borrowers can borrow a newly formed DAI offering by locking in ETH or ERC-20 tokens as collateral. They can earn interest or make a transaction. They can return the DAI to the system to unlock their collateral. For example, you have a certain amount of Ethereum and you need to make a payment, but you do not want to sell your Ethereum. On this platform, you can lock your Ethereum to get DAI and you can use it however you want. You can unlock your Ethereum later by paying back the DAI. Meanwhile, you can earn interest on the DAIs you have. The interest rate of DAI is universal, and it is determined by MKR token holders.
Compound:
Compound operates in a similar way. Users can borrow or lend by locking collateral on Compound. The collateral can be unlocked when the loans or debts are repaid and you can regain access to your assets. There are cTokens on Compound, just like MakerDAO. With these cTokens, which can be obtained by locking a certain amount of collateral, users can engage in many activities such as earning interest or trading.
Dharma:
Dharma allows lending by peer-to-peer matching lenders and borrowers. On Dharma, borrowers and lenders use fixed term and interest rate loans. Dharma is a platform where users can lend or borrow with ease.
Synthetix:
Synthetix is a platform which allows users to create synthetic versions of assets such as gold, silver, cryptocurrencies and traditional currencies like Euro and exchange them.
