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If you have got into that crypto-twitter of late, you would have stumbled upon talks on DeFi and yield farming, ‘YAM’ etc. If these words left you puzzled and scratching your head, you’re not alone in this.
You have a multitude of people new to the field and figuring out things just like you do. We are here to help you figure out what all this is about.
What is DeFi?
Decentralised Finance, abbreviated as DeFi, aims to revive the traditional systems in financing with lesser intermediaries. Most of the activities in the financing, including lending, borrowing, structuring derivative products, and transaction of securities, can be done through decentralised open-sourced networks. Most of the applications are created by Ethereum, but other platforms could also work in it.
Functionalities of DeFi
Common cryptocurrencies like bitcoin are known for their volatility in the market. But DeFi exists through stable coins. These are associated with international currencies like the USD and the Chinese Yuan. Common types of stable coins include the USDT, USDC, TrueUSD.
Few categories dominate DeFi.
Borrowing and Lending
DeFi entitles you to take out loans with no applicant review or even a bank account. Some DeFi goes to the extent where you don’t go out and find a lender. The contract itself turns out to be the lender, and rates of interest are calculated based on supply and demand.
DeFi also lets the borrowers keep their attests as security. These are locked in a contract until the loan is refurnished. Common examples of DeFi include Aave, Compound, etc.
Decentralised exchanges
In the usual go, security transactions and cryptocurrencies are done in platforms run by third parties. This would entail troubles and loss from the middlemen. What if there was a machine making endless exchanges through a smart contract.
DeFi evades the possibility of intermediaries and facilitates peer-to-peer exchange. Examples would include Curve, Uniswap, and Synthetix.
Asset management
DeFi promotes and facilitates frameworks to pool in funds for investment with automated assets and aggregators. Yearn, Finance, Melon, Set protocol, and Insta.dapp.
Decentralised prediction markets
The next category encompasses on betting on something occurring and not occurring. This includes decentralised prediction markets and insurance in an automated fashion.
Synthetic Asset Bridges
Bitcoin as an asset has been of great functionality as a great store of values, at the same time, challenging to monetize and mobilise. You might equate it with a gold locked in a vault. You’re not able to access it when the need arises.
On creating a digital representation, you get to use it in financial contracts. Platforms acting as synthetic bridges include BitGo and REN. DeFi also ensures to combine different smart contracts with dexterity.
