DeFi Ultimate Getting Started Collection, the basics of DeFi you want to know are here

This guide is structured to provide beginners with an overview of Decentralized Finance (DeFi). First, I will explain DeFi and its attributes for implementing an open financial system. Next, I will introduce the concepts and terminology of decentralized finance.

DeFi Ultimate Getting Started Collection, the basics of DeFi you want to know are here

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Feel free to jump to the part that interests you most, but we recommend that you read through the entire guide to get a comprehensive understanding of how decentralized financial protocols and applications work together. Note: This article is not exhaustive, but a powerful introduction to the Ethereum DeFi ecosystem through specific examples.

table of Contents

  • What is decentralized finance?
  • How does a decentralized financial definition work?
  • Is decentralized finance useful?
  • How much money is locked in decentralized financial applications?
  • What is a stablecoin?
  • Crypto lending
  • What is DEX (Decentralized Exchange)?
  • What is the prediction market?
  • What is a non-destructive lottery?
  • What is a synthetic asset?
  • DeFi for payment
  • DeFi for banking services: what is decentralized banking services?
  • What are databases (Oracles)?
  • How to participate in DeFi?
  • Other common problems

What is decentralized finance / open finance?

Decentralized finance (or open finance) refers to the paradigm shift from today's closed financial system to an open financial economy based on open protocols that are interoperable, programmable and composable.

Ethereum is creating a new economy that integrates blockchain technology and cryptocurrencies with the current financial system. DeFi isn't about creating a new system from scratch, it's about democratizing existing systems and using open protocols and transparent data to make it more fair.

How does decentralized finance work?

Decentralized finance utilizes three key principles of the Ethereum blockchain to completely change the existing financial system to enhance personal capabilities and provide greater financial freedom.

1. Interoperable

The current financial system consists of walled gardens (such as financial institutions) with limited transferability or two-way access. Where interoperability is possible, it is controlled by middlemen and renters. Open finance is defined by platforms that can cooperate with each other with a certain degree of transparency and have complementary functions.

2.programmable

Bitcoin has revolutionized the currency by creating a self-sovereign and politically unaffected asset. Ethereum enables new financial instruments and assets that are more customizable than existing products and services. Digital assets and securities will usher in a new era of financial mechanisms and growth.

3. Can be combined

Composability refers to the concept that something can be selected and assembled in many combinations (like Lego toys). Ethereum has proved the value of composability by becoming the underlying protocol of other protocols (such as Maker, UMA, Augur, Compound, etc.).

Is Decentralized Finance (DeFi) useful? How will it affect the world economy?

Decentralized finance provides access to traditional financial services to everyone around the world by removing intermediaries and barriers to entry, and by using blockchain technology. It is recognized that DeFi applications and services have the potential to bring greater benefits to less developed countries or countries with less stable economies. However, the benefits of DeFi can still be realized by people in developed countries, especially in terms of obtaining loans, investing in new assets and generating new revenue models.

How much money is locked in decentralized financial applications?

A common indicator used in decentralized finance is the amount of funds “locked in” or used by applications and protocols. Similar to the use of capital by banks and large companies to create trillions of financial products and derivatives, the Ethereum protocol uses capital to create value for decentralized financial products and applications. The amount of capital (Ethereum, USD, other assets) stored in these agreements is referred to as the amount “locked in DeFi”. Although the amount locked in US dollar numbers is relatively meaningless, the amount locked in Ethereum or other crypto assets can represent the growth of decentralized financial (DeFi) protocols.

What is a stablecoin?

A stablecoin is a cryptocurrency asset that maintains a stable value relative to a target price (such as the US dollar). In the past two years, various types of stablecoins have emerged.

What types of stablecoins?

Here are some types of stablecoins:

  • Fiat collateral-backed by a single currency or a basket of fiat currencies
  • Crypto asset collateral-backed by crypto assets (most commonly Ethereum)
  • Resource support-stablecoins backed by another asset, such as gold
  • Hybrid model-a model that combines any of the above or adds other attributes to maintain stability

Most stablecoins in development will focus on the fiat currency collateral model because it is easier to maintain stability and integrate into existing financial systems. Banks and financial institutions can more easily use stablecoins denominated in a single currency or a basket of currencies instead of using stablecoins supported by cryptocurrencies such as Bitcoin or Ethereum.

Many companies are trying to create stablecoins that can be used worldwide. Facebook is preparing for Libra. Wal-Mart is preparing for Wal-Mart Coin. The USDC issued by Coinbase can be used in more than 80 countries. Binance recently announced its stablecoin plan, Venus. JP Morgan created a digital asset to resolve transactions between institutional clients. Institutions around the world recognize the potential impact of stablecoins, and the International Monetary Fund states: "Stable currencies pose a threat to banks and cash."

Over the past few years, stablecoins (such as Dai stablecoins) that have been secured by cryptocurrencies have achieved relative success. Dai's design philosophy is to maximize decentralization, keeping it from the control of any single or group of entities. The MakerDAO Foundation, which is responsible for designing and developing the protocol that runs the Dai stablecoin, uses a separate token called Maker (MKR) to help Dai maintain its price peg.

What is a crypto lending agreement?

One of the breakthrough use cases for Decentralized Finance (DeFi) is the ability to obtain loans without the need for trusted parties or intermediaries such as banks or large companies. MakerDAO is one of the first applications to enable users to get loans from anywhere. Maker Vault needs to deposit Ethereum before lending Dai to users. One issue to note is that users must maintain a mortgage rate of at least 150%-so if you put 1 ETH in the Maker Vault for $ 162 / ETH, then CDP will fall when ETH drops below $ 89 Will be automatically cleared. Although this type of loan requires more capital to be stored in advance, it allows individuals to retain their underlying assets (Ether). So, imagine a situation where you can deposit some kind of asset that you plan to hold for a period of time, such as a potential part of the S & P 500 index or 401k. With this loan structure, you can get a loan from capital without having to sell it. Although this is not particularly useful for borrowing large amounts of money, it has the potential to help individuals borrow small amounts of money.

Recently, more types of lending protocols have been built on top of Ethereum, including Compound, Fulcrum, Aave, etc. Both Compound and Fulcrum have created a pool of funds, allowing users to borrow or lend crypto assets such as Dai, USDC (Coinbase's stablecoin), and Ethereum.

Crypto lending agreements essentially break down barriers to accessing funds. Getting a loan in a traditional financial system requires going to a bank and meeting the necessary requirements (credit scores, jobs, etc.). Often, these requirements can hurt those who need the loans the most, such as self-employed people, students, local entrepreneurs, or people from communities that are deprived of their rights. Access to capital is the basic prerequisite for financial freedom, which is usually under the care and control of traditional institutions.

How do I get a loan backed by cryptocurrency or earn interest?

Anyone can take advantage of the Compound protocol by downloading MetaMask or other cryptocurrency wallets. Dharma, a company that initially competed with Compound, now uses Compound's agreement to offer its customers the best possible interest rates. Dharma achieves this with its "smart wallet," which automatically deposits customers' funds into the Compound protocol.

Recently, many cryptocurrency exchanges (such as Binance) have also started to provide lending services for various crypto assets. Although using a cryptocurrency exchange is a more centralized option than using Compound, it can be said that it is less centralized than traditional banks because Binance and other exchanges are using decentralized transactions that are not controlled by a single country (such as the US dollar) Centralized stablecoins and crypto assets.

These different protocols demonstrate the power of composability: 1) Dharma through 2) the use of Compound's open protocol, 3) the Dai stablecoin mainly provided and borrowed from the MakerDAO protocol, and 4) an open platform on top of Ethereum . Welcome to this new financial system.

What are the best crypto lending / interest paying companies and agreements?

You can find the best deals on sites like DefiPrime, which tracks many DeFi agreements.

But DeFi lending is more than just seeking the best interest rate. Before using a loan agreement, a number of factors should be considered, including the sum of the risks and liquidity pools of smart contracts.

To help individuals and new users in the community, ConsenSys has created DeFi Score, a consistent and comparable value for measuring platform risk based on factors such as smart contract risk, collateral and liquidity. DeFi Score is a framework for quantifying risk in unlicensed lending pools. The project was originally conceived by a team at ConsenSys and is now open source and open to the community.

You should evaluate all of these factors before deciding on the agreement / company that you decide to offer the loan.

What is DEX (Decentralized Exchange)?

The financial system operates through open markets and requires strong trading and transfer value mechanisms. So far, the crypto asset trading landscape has been dominated by some large players, mainly Coinbase, Kraken, Gemini, Bitstamp, Bitfinex, and Binance. All these exchanges are centralized and therefore controlled by a group of individuals or companies.

Decentralized exchanges (DEX) provide a new model for trading and exchanging assets without relying on a single intermediary or oligopoly (controlled by a few individuals / companies).

Uniswap this year has become a decentralized exchange (DEX) for trading cryptocurrencies with an intermediary. Uniswap reports that Uniswap traded more than $ 8 million in 24 periods in November 2019. Uniswap currently accounts for 33% of total DEX (more than IDEX and Kyber). DYdX, another decentralized exchange, has developed a platform that combines trading, lending and lending. The dYdX decentralized exchange aggregates the spot prices of its multiple users and loan liquidity across multiple exchanges. Other district mayor Xinhua exchanges or agreements include 0x, AirSwap, Bancor, Kyber, IDEX, Paradex and Radar Relay.

Blockchain analysis company Alethio created DEXWatch to monitor the activities of a decentralized exchange (DEX), including tokens, traders, and transactions. DEXWatch can display charts of decentralized exchange (DEX) activities.

What is the prediction market?

Prediction markets are platforms that enable individuals to place bets or gamble on the outcome of events, games, elections, etc. Predictit is one of the most famous prediction market applications, although users from various countries are not allowed to create accounts and use the application. Many jurisdictions around the world do not allow individuals to gamble or bet on specific events, including elections, sports, judicial results, and other controversial events.

Ethereum enables prediction markets to operate outside jurisdictions, thereby providing a true prediction market for everyone worldwide. Why is this important? Prediction market platforms and applications rely on the "wisdom of the crowd" to determine the likelihood of any outcome. The concept is based on solid scientific evidence that many people (crowds) are almost always more accurate than individual experts when predicting the outcome of a general event.

What is the prediction market for Ethereum?

Augur is a prediction market platform where anyone can create or bet on markets (games, events, elections). The Augur protocol running on the Ethereum blockchain allows individuals to buy or sell stocks with potential results.

In Numerai's stock prediction tournament, data scientists created models for trading on the stock market, requiring data scientists to bet their own predictions with personal capital in the form of NMR tokens. Data scientists are then rewarded for the accuracy of their predictions and the amount of money invested. The stronger the belief, the more individuals are willing to bet or bet on their trading model.

In addition, Numerai created the Erasure protocol, which provides a data market where individuals can use their specific knowledge to sell forecasts or information about the world that are transparent and enforceable through contracts. The Numerai Championship and Erasure Market provide any individual with the opportunity to earn income based on their skills or unique personal knowledge.

How does the prediction market work?

For example, a market creator can generate a market for: "Which team will win the Champions League?"

The creator of the market can define a set of possible outcomes, such as "Juventus" or "Real Madrid". At the beginning, these options were divided into sections, and the sum of all shares was $ 1.00, which is a 100% probability. Earn $ 1.00 with the winning portion. For example, if Real Madrid had a 51% chance of winning (and they did win in the end), each Real Madrid shareholder would receive a earnings of $ 1.00 per share.

What is a non-destructive lottery?

Lossless lottery refers to a standard lottery where participants do not lose their initial investment. A non-destructive lottery pools all the funds in the purchased lottery and invests it in some kind of asset. Then, the proceeds of the assets within a predetermined period of time are distributed to the winners.

PoolTogether is a lossless lottery built on Ethereum that enables people to buy lottery tickets using Dai. PoolTogether allows anyone to use Dai to buy lottery tickets, and then keep the earnings in the Compound for a certain period of time (week, month, year) (generating interest). The winner of the lottery receives accumulated interest from all pooled funds, and the other owner (loser) will also recover their original money.

Although a non-destructive lottery limits the possibility that anyone can win a prize, this lottery prevents the long-term losses that many people suffer when gambling on the lottery.

What is a synthetic asset?

Synthetic assets are not unique to Decentralized Finance (DeFi). Now, most people are familiar with the 2008 financial housing crisis: large banks bought a bunch of mortgage-backed securities (bonds, financial products, etc.) and then created new derivatives and synthetic securities that were mainly used for speculation. Mortgage and real estate markets. When the real estate market collapsed, the value of all mortgage-backed securities, along with most synthetic assets that were otherwise derived from other securities, collapsed.

However, this is not to say that speculative tools and financial mechanisms are inherently bad. Speculative tools and mechanisms are an important part of any new asset class, especially assets designed to be the foundation of an open financial system. The financial crisis of 2008 was more severe, because much of the information (from bond pricing to asset pricing) was controlled by opaque, centralized entities. A key aspect of Ethereum is that these protocols are open and accessible to anyone.

Currently, many companies are creating agreements to create synthetic assets and derivatives encoded by smart contracts. UMA (Universal Market Access) is creating a derivatives platform to provide standardized contracts for financial products. Another crypto company, Synthetix, is developing a protocol that will create and issue synthetic assets such as cryptocurrencies, fiat currencies, and commodities.

The synthetic assets and derivatives provided by the open source agreement will create value for investors looking for hedging risks, diversifying capital allocation and looking for mechanisms to increase return on investment. There are no restrictions on the type of derivation that can be created using crypto assets. For example, there are already a dozen variants of Dai created by other DeFi protocols. Ethereum's data transparency and its potential to build on top of and collaborate with other Ethereum-based protocols offer endless possibilities for content created in a decentralized financial ecosystem.

DeFi for payment

As the world naturally shifts to digital local payments, the mechanism for making payments with cryptocurrencies, which may eventually become the local currency of the Internet, will be more used in daily transactions. Ethereum naturally allows anyone to make cross-border payments or transactions without paying the intermediary fees common in traditional financial services.

Ethereum also supports small payments and allows individuals to easily make remittance payments. Today, global payments and remittances are performed by many intermediaries that charge exact tolls on their services. The time required to transfer $ 200 from country to country is 2 to 7 days, with a global average cost of 6.94%. DeFi can streamline payment and remittance processes, shorten settlement time, and significantly reduce costs for users worldwide.

Which companies accept Bitcoin and Ethereum for payments?

As the crypto ecosystem expands, more and more companies are beginning to accept Bitcoin, Ethereum or Dai as payment methods. Lolli enables users to earn bitcoins while shopping online. Although you can't pay on Amazon with Ethereum or tokens, more companies will offer this option in the coming years.

What is a decentralized bank?

Decentralized banking refers to the concept of eliminating the need for bank accounts. 70% of Filipinos still do not have a bank account and cannot use a checking or savings account. This is not uncommon, as billions of people worldwide do not have access to the same financial systems as more developed economies.

Providing banking services to people without bank accounts requires a combination of IoT and blockchain technology to provide financial services for everyone. DeFi is building many applications and services for decentralized banking, including lending, payments, and investments. Other important features, including identity, crypto wallet, insurance, data storage, etc., are all developed by individuals or companies within the broader Ethereum ecosystem.

What is Oracles?

Oracle is any system that provides external data for use on the chain. Without Oracle, smart contracts on Ethereum will only be able to perform operations on data on the chain. Oracle has expanded the potential use cases of smart contracts to include insurance, finance and a stronger forecasting market.

The decentralized oracle provider Rhombus divides oracle into two broad categories:

  • How Oracle is activated
  • How Oracle responds

The Rhombus API for running Oracle has predictable, resource-oriented capabilities that enable you to connect smart contracts with actual data. When allocating large amounts of money in decentralized financial applications, the ability to access accurate and trusted data is critical. For more information about Oracle, visit Ethereum.org.

How do you participate in DeFi?

If you want to participate in or increase the adoption of Ethereum, you can buy Dai first and use it where you can / live. If you are a developer, please contribute to open source projects and tools that bring Dai and stablecoins to the world. If you are an enthusiast, educator, writer or translator. What sets cryptocurrencies apart is this open source global community, everyone is welcome to join.

Other common problems

How important is blockchain to the world economy?

Blockchain networks, especially Ethereum, will fundamentally change the way the world economy operates by reducing operating costs, eliminating middlemen and creating new markets. Obviously, the future in ten years cannot be predicted, but blockchain technology will become an integral part of business functions and daily life. Read more about how blockchain technology will impact various global industries, including supply chain management, energy, government, real estate, and more.

Can you profit from investing in stablecoins in Dai or USDC?

Stablecoins are designed to reduce the instability of cryptocurrencies (i.e., Bitcoin, Ethereum) by maintaining a constant value. Therefore, buying Dai or USDC and keeping it in a wallet does not add value. However, various cryptocurrency lending protocols (such as Compound and Fulcrum) bring interest for lending stablecoins (such as Dai or USDC). Therefore, although you cannot profit from rising stablecoins, it is possible to benefit indirectly by lending stablecoins that you do not use, similar to how banks provide interest rates for depositing cash into banks. The difference is that the interest rates offered by banks are very low, while loan agreements can yield approximately 4-9% of returns under the agreement. Using any crypto lending agreement increases the risk, and you can learn more on Defi Score.

Do cryptocurrency pay dividends?

Most cryptocurrencies do not pay dividends in the traditional sense. Ethereum, Ethereum's local cryptocurrency does not pay dividends, and Bitcoin does not pay dividends. However, depending on the design, security tokens and other financial crypto assets may pay dividends or give owners the right to share company income.

Is there a better DeFi blockchain than Ethereum?

No. Ethereum has established a dominant position in decentralized financial applications, in part because Ethereum has four times as many developers as the blockchain network behind it. Although other blockchain networks have been used in gaming applications, the more centralized nature of other blockchains has led to fewer financial-based applications. The decentralized nature of Ethereum ensures that individuals trust the protocols and applications developed on top of it.

What is the application of blockchain in financial services?

The Ethereum blockchain can realize a more open, inclusive and secure business network, shared operating models, more efficient processes, reduced costs, and new products and services in the banking and financial fields. It enables digital securities to be issued at a lower unit cost in a shorter period of time and has a higher level of customization. Digital financial instruments can be tailored to investors' needs to expand markets for investors, reduce issuer costs, and reduce counterparty risk.