Decentralized Finance (DeFi)
Decentralized finance (DeFi) is the idea of dividing financial services into separate, interconnected parts that operate together in an open and unlicensed ecosystem on the internet.
It is illustrated by several overarching design principles.
Openness and lack of permission: Anyone, anywhere, can access it if they want without the need for intermediaries or the approval of intermediaries.
Interoperability: Different DeFi applications can interact seamlessly with each other, fitting together like Lego blocks to create a sophisticated internet financial system.
Confidentiality, transparency and trust. DeFi applications must be open source and their internal workings must be publicly visible. When possible and practical, dependence on third parties should be minimized and applications should be largely automated.
This is in stark contrast to traditional centralized finance (CeFi), where everything is done through opaque central institutions and intermediaries. For example, central banks create money, while commercial banks hold money and through intermediaries, providing a variety of financial services that make the world go round.
Bitcoin started DeFi’s transformation by eliminating the process of creating money from central banks and bringing it online wherever anyone can, in the form of Bitcoin mining. Crypto wallets, on the other hand, allow anyone to have personal supervision over their money and send it wherever they want without having to depend on the bank.
However, DeFi goes even further. It aims to do the same thing for all other financial services, such as payments, loans, insurance, savings accounts, regulated investments, etc., making them public. on the internet and be able to connect. each other.
Here’s what is starting to happen this year. Specifically, we’ve seen many of these apps start to connect with each other, and engage users. The result is a booming DeFi ecosystem that didn’t exist a year ago.
At the beginning of June 2020, about US $ 1 billion was stuck in DeFi. A month later, that figure more than doubled to $ 2 billion. And a month later, in early August, it doubled again to $ 4 billion.
Imagine what that number might be at the end of the year.
This amount is determined by DeFi participants in different ways, and many trends that will define cryptocurrency by 2020 can be considered a subset of the larger DeFi movement.
Stablecoins and synthetic assets
Stable currencies and synthetic assets are an important part of DeFi.
These cryptocurrencies are designed to track the prices of other assets, helping to bring stable real-world values into space, such as the value of one US dollar. It also greatly expands the horizons of possibilities in the DeFi space.
While stablecoins have been around for a long time, by crypto standards, the DeFi boom has shown that they are both indispensable for the future of the industry and one of the trends to watch. in 2020..
Some of the potential developments that you might want to track over the coming months, based on stablecoins and synthetic assets, are as follows.
Banks that issue stable coins are guaranteed
When the line between DeFi and the “real economy” blurs, it’s more likely that the real economy will go online. Money-back guaranteed stablecoins provide an easy way for banks, and even central banks, to securely enter the DeFi space.
In the long run, we can see guaranteed stablecoins as catalysts for world-changing events, such as the falling US dollar as a global standard.
Expansion of algorithmic stablecoins
With a bit of creativity, algorithmic stablecoins can gain an impressive competitive advantage over other forms of currency, which can be game changers.
MakerDAO, for example, seeks to allow more assets, including real-world ones, to be used as collateral. Finally, you can start using part of your home equity or other real assets to secure a stable loan. The effect is to free up real world value of assets and let them communicate favorably with DeFi technology. In the process, MakerDAO can evolve from an algorithmic stablecoin into a full-fledged synthetic asset platform.
Meanwhile, Terra invented a system in which seigniorage profits are reinvested as rewards like refunds to users, with the aim of creating a new super competitive payment network.
Seignorage refers to the profits earned from mining new currency. It is technically the difference between the cost of making money and the face value of the money being generated. This source of income is often the realm of central banks, but algorithmic stablecoins can be used elsewhere.
As a result, this trend — the shift from individual cryptocurrencies to connected ecosystems — could eventually become a major catalyst for the entry of more traditional institutions into the air. DeFi, making it an important trend to watch out for. .
Of course, when considering alternative finance, it’s impossible to ignore the current economic crisis or underestimate its potential impact on cryptocurrencies.
Like gold, Bitcoin is often seen as a hedge against currency devaluation, and in the growing DeFi space Bitcoin and gold could start to make a profit with other assets, making them potentially attractive. much more than before.
While it is beyond the scope of this article to say whether traditional investments are overvalued, it is beyond the scope of this article to gently point out that the S&P500 has hit an all time record on August 13, 2020 and wonder if it could be a little earlier given the still staggering unemployment rate in the US and the possibility of a drop in consumer spending.
It can also be pointed out that yields on the US Treasury are holding historically low when people have no place to safely put their money.
2020 was marked by uncertainty, a lack of solid investment, and a shrinking economy. And in that sense, DeFi, with its high output and explosive value, represented a polar opposite at the right time.
The high probability that the current economic uncertainty will trigger DeFi’s boom later this year means that the COVID economic crisis is certainly a trend to watch.
However, in mid-August when this article was written, DeFi was still very small. If the interests of cryptocurrencies are the best-kept secret financial secrets, then DeFi must be the best-kept cryptocurrency.
It’s quite revealing when comparing the current value locked in DeFi ($ 4.75 billion) with the market cap of Bitcoin ($ 213 billion) and other giants.
Comparative stock market capacity (billion USD)
DeFi is at the center of the biggest crypto trend of 2020 and it’s just getting started.
So if you’re reading it probably means you’ve been there early. Welcome!
If you want to get started with DeFi, but don’t know where to start, you might consider joining through Binance.
Firstly, because the only thing you really need to get started with DeFi is cryptocurrency (Ethereum instead of Bitcoin is a better option for DeFi) and if you are comparing prices between different exchanges, then the opportunity is great. that you see Binance as the most profitable option.
And second and third, because Binance has one of the biggest crypto options in the world, including DeFi options like SNX, KAVA, and YFI, and because you can bet and lend electricity live through Binance. to start making a profit without having to worry about gas costs. , manage private keys and other headaches before you’re ready to go.
With the advent of these top crypto trends, 2020 is shaping up to be a pivotal year for cryptocurrencies.