DeFi (DAO's & DAPPS) Information
DeFi, shorthand for “decentralized finance,” is a catchall term for a group of financial tools built on a blockchain. The idea is to allow anyone with internet access to lend, borrow and bank without going through middlemen. DeFi is one of the fastest growing areas of the blockchain and decentralized web space. Bitcoin—a payment system in which anyone on earth can send money to anyone else—was just the start of the crypto revolution. The people building DeFi applications seek to take accessibility one step further. Decentralized finance has been touted as a possible solution to lowering the barrier of entry for those who struggled to access bank accounts. And more recently, it's being utilized by cryptocurrency owners for another purpose: to make more money.
What can you do with DeFi? There are three basic types of DeFi applications. Lending/borrowing: If you own cryptocurrency, you can lend it to a protocol such as Aave or Compound in exchange for interest and/or rewards. Likewise, you can borrow digital assets from such a protocol, which is particularly useful if you want to make a trade. Be careful, though! Most DeFi protocols use over-collateralization, meaning you must put up more than the amount you want to borrow; if the asset's value falls too much, the protocol may take your collateral to avoid losses. Many DeFi users utilize this as a way to earn assets through "yield farming," in which they lock up funds in a pool of assets to get rewards. Since rates vary depending on protocol and asset, skilled yield farmers move their assets to capitalize on the best rates. Trading: With centralized exchanges such as Coinbase and Binance, you're relying on the exchange to take custody of your assets with each trade. Decentralized exchanges remove the intermediary so people can trade directly with one another. Moreover, DEXes such as Uniswap and PancakeSwap allow people to list new tokens for trading. The lack of vetting increases the risks, but it also allows people to "get in early" on new assets before they hit wider markets. Derivatives: Sometimes you don't want to be limited to trading particular coins or tokens. Derivatives platforms such as dYdX and Synthetix allow people to do more than spot trading. For example, users can make leveraged trades in which they bet more than they have, or even create "synthetic assets" that mimic traditional stocks and commodities.
How are DeFi applications produced? Anyone capable of writing smart contracts is able to create DeFi applications. There are several tools for testing and/or deploying smart contracts, among them Truffle and Ganache for Ethereum. After downloading a framework to build smart contracts, you can create a token that allows a protocol to utilize the blockchain network. On Ethereum, this is an ERC20 token; on Solana it's called SPL; and Binance Smart Chain has BEP20s. Having a token allows the protocol to interact directly with the layer-1 blockchain's coin. But projects have also promoted their tokens to push decentralization. Lending protocol Compound, for instance, uses COMP as a governance token; those who hold it get to make decisions about the protocol's code and treasury allocations. In a decentralized network, transactions are person-to-person (P2P), and assets are held in fragmented form across multiple computers or nodes rented out by private individuals. The absence of an intermediary means: 1) lower cost 2) faster speeds. The system is also more reliable as it (in theory) eliminates the potential for human error, and less biased in that services are open to all. The rise of the dApps Smart contracts developed for the blockchain that facilitate specific processes are known as decentralized apps (dApps). DeFi dApps map on to the core functions of a bank: Payments, Saving, Borrowing, and Trading. Escrow is an example of a traditional banking function that can be easily replicated and enhanced as a dApp in the DeFi universe. When submitting advance payment for a service, the traditional approach requires a third party (such as eBay) to hold on to the funds and decide when to release them. This requires bureaucracy and cost, and also opens the door to human error. eBay also has the power to refuse transactions and block users from the platform. In a ‘trustless’ escrow scenario, the transaction is intermediated entirely by a smart contract, which releases the funds if and only if the agreed conditions are met.