What Is DeFi? Understanding This New Technology
Universal access to money and payments, open to anyone, no matter where you live –– this has always been the motivation and the big promise of cryptocurrencies. The decentralized finance (DeFi) movement takes that promise even one step further: Imagine a world where everyone has equal access to any sort of banking services, accessible with just a smartphone and an internet connection, from anywhere in the world. Welcome to this new playground of equal opportunities for everyone!
What is DeFi?
DeFi is an abbreviation for decentralized finance, a term used to describe peer-to-peer financial products and services built on top of public blockchains like Ethereum or DeFiChain. Behind this rather abstract definition lies a simple assertion: DeFi wants to offer all the things your local bank supports like earning interest, borrowing, lending, trading assets, trading derivatives and many more, but without the associated costs.
But that’s by far not all! DeFi services are also much faster than their traditional counterparts and they don't require any paperwork or even a third party such as brokerages, exchanges, or banks to work. This makes them the ideal vehicle to create a more open and fair financial system for everyone.
How does it work?
Unlike with conventional banks, DeFi doesn’t require you to open a bank account, fill out an application or verify your identity –– everything happens without an intermediary and is done completely online. The backbone of DeFi are smart contracts, which power everything from decentralized loans, digital assets, to any form of decentralized application (dApp).
Smart contracts are programs running on a blockchain that can trigger events when certain conditions are met. But they can do more than that and only develop their full potential when they work closely together. In that sense, they are like money legos –– they can be connected to form new, even more powerful products and services. As a result, new innovations are popping up everywhere, creating exciting job opportunities by financially empowering users around the globe and opening up previously unknown income streams.
This spider web of digital money legos creates an alternative financial system, copying things, which are working well within the conventional financial system and inventing radical new forms of decentralized banking applications by applying sound monetary policy principles. And the best part is that everyone can use it without having to trust a central authority.
Through radical innovations like the internet, the blockchain technology and cryptography, a new financial system is collectively being developed by its users for its users. This collective push of boundaries beyond the limits of mainstream finance is unique in modern financial history and opens up opportunities for anyone with an internet connection.
What are the benefits?
What can you do with DeFi?
Even though DeFi is a rather young technology, it has, according to DeFi Lama, already attracted a whopping $178 Billion in crypto assets that are locked in various DeFi protocols. It’s widely agreed that DeFi kickstarted with the launch of MakerDAO in 2017, making it the first true DeFi dApp that offered the possibility to lock up Ethereum as collateral and borrow against that crypto stake.
Since then, a lot has changed. New companies and protocols have entered the market and decentralized finance as a whole has blossomed across a variety of sectors including, but not limited to, lending protocols, derivative protocols and trading protocols.
These protocols can then be divided into different categories, including some of the following fields of interest.
Borrowing / Lending
DeFi lending platforms allow users to lend their crypto in a completely decentralized and trustless way to other users. A borrower on the other hand can directly take a loan by interacting with the decentralized lending protocol. In addition, the lending protocol automatically distributes interest rate payouts to the lender in time intervals as short as a few seconds.
Decentralized Exchanges, or short DEXes, are programs that allow users to buy, sell and trade crypto currencies. Unlike centralized exchanges, DEXes operate without a gatekeeper or notary in a purely decentralized peer-to-peer way. The underlying smart contract enforces the code and executes the transaction. Try it out yourself and use the DeFiChain DEX to swap from one coin to another.
In traditional finance, a derivative is a contract that derives its value from the performance of an underlying asset. This asset can be virtually anything –– interest rates, precious metals or indices. In the DeFi space, anyone can create these derivatives and secure them with smart contracts without the need of any intermediaries. Synthetix is one of the first movers in that space, but other protocols like DeFiChain are drawing inspiration from it and building an even more sophisticated and secure derivative platform.
Yield farming is a rather new term and describes the effort to put crypto assets to work and generate the most returns on those assets. The simplest form of yield farming one could think of would be constantly chasing the highest APYs among different DeFi products. This would mean shifting money around protocols and products with different risk exposures as the user is looking for edge cases to maximize his or her returns.
The culmination of all of this is liquidity mining, where yield farmers generally receive new tokens on top of the usual returns for providing liquidity to the protocols. Instead of farming yield off the normal operations of various protocols, supplying liquidity to liquidity pools opens up an additional income stream in the form of trading fees and a governance token giving its holder influence over landmark decisions.
How does Cake DeFi come into play here?
Cake DeFi is the window into the world of decentralized finance and connects the traditional financial industry with the new, exciting DeFi ecosystem. Besides all the positive aspects of DeFi one should always remember that DeFi is still a nascent technology, and as such is still not as user friendly as one might be used to from his or her traditional banking apps.
Cake DeFi wants to change that by offering a simple and intuitive interface known from banking apps already in use and tapping into the money lego world of decentralised finance protocols. This drastically flattens the learning curve and makes DeFi services accessible to even newbies. Cake DeFi takes you on the hand and guides you through the DeFi jungle by making it as easy as using a credit card, albeit not sacrificing the high DeFi yields. It can’t get any easier to get exposure to decentralized finance services than that. Try it out yourself and download the brand-new Cake DeFi App for Android and iOS.