While theorists argue about the capabilities of the blockchain tech, builders are busy creating. During the past couple of years, we’ve witnessed a rising wave of ambitious projects that have joined forces to fight the centralized financial system and transform the traditional banking economy. The alliance of these projects is now officially called DeFi.
DeFi, short for decentralized finance, can be described as an infrastructure of blockchain-powered decentralized tools such as digital assets, protocols, and dApps that mainly run on the Ethereum network. Most of them are open source and aim to provide solutions for the convenient management of your digital funds.
Why Do We Need Decentralized Finance?
The fiat currency system is far from ideal – cash payments are inconvenient, so we all prefer to use our credit and debit cards. The problem with cards or other instant payment systems is that there is an almighty third party, whether it’s a bank or the government, that takes control over your money. Apart from charging various commission fees, banks may freeze your accounts for multiple reasons, not to mention financial crises, inflation, human factors, and privacy issues.
Besides, there is a huge percentage of people residing in developing countries who still remain unbanked and have no access to credits, loans, and other privileges.
Our financial system is also far from being fair and transparent and it’s clear that the world needs an alternative solution. That being said, decentralized finance might be the answer.
With Bitcoin and other cryptocurrencies coming into play, the situation with our financial system has potentially improved, but it has not changed completely. Although we’ve got a way to issue, store, and transfer money to one another on our own, the only safe way to get access to cryptocurrency is via centralized exchanges.
On top of that, the majority of crypto projects that help us manage our finances are run by non-transparent, ‘yet another third-party’ companies.
But DeFi is working on a breakthrough.
DeFi Projects for Dealing with Your Finance
There are a lot of challenges that have to be faced in the years to come, from adoption to development, but open finance projects have been consistent in their efforts to create a unified ecosystem where all elements can easily interact with each other. As a result, we’ll be able to combine various applications together and make use of customized solutions.
Now, let’s take a peek at the key players of the modern DeFi scene.
A stablecoin is a non-volatile cryptocurrency token that is pegged to fiat currency or other crypto.
There are three main types of stablecoins: crypto-collateralized, fiat-collateralized, and non-collateralized. The last ones, however, haven’t been able to figure out a solid working mechanism so far.
You can learn more about stablecoins here.
Dai (by MakerDAO)
Pegged to USD but backed by Ethereum, Dai by Maker is one of the most well-known stablecoins that uses cryptocurrency as collateral. The Dai coin cannot be mined, instead users have to leverage Ethereum in a smart contract called Collateralized Debt Positions. Ethereum will then be locked by the smart contract, and can only be reclaimed after the user pays back the debt plus the stability fee in MKR (Maker’s governance token).
If you wish to learn more about MakerDAO and Dai, read one of our previous articles.
Tether Coin (USDT)
Tether is an example of a fiat-collateralized stablecoin that is pegged directly to USD. The company behind it claims that each Tether coin is backed by their reserves in cash equivalents and, since recently, “other assets and receivables from loans made by Tether to third parties”.
However, the decentralized nature of these fiat-pegged cryptocurrencies remains uncertain as they have to provide a physical fiat coin for every token that they issue. And where do you think they keep those precious funds but banks?
If you are a fan of blockchain games, you probably already know all about OpenSea, the largest marketplace for non-fungible tokens and crypto collectibles. In OpenSea you can search, buy and sell a wide range of unique digital blockchain-based tokens such as crypto art, gaming items, and others. From BlockchainCuties to Decentraland’s land parcels to collectible Gods Unchained cards – the marketplace has a lot to offer. And thanks to the straightforward navigation system it is easy to browse through their truly large collection of items.
And if you don’t know where to keep your ERC721 tokens, an Ethereum token standard used for crypto collectibles, download Lumi Collect and store your precious tokens securely and in style.
Request is an open and decentralized network for creating, storing, and accessing invoices and receipts. By providing permissionless access, Request makes sure that its data is not only simply accessible and immutable, but at the same time private whenever necessary.
The consolidated network of transaction requests lets companies that facilitate accounting, auditing, payment processing, and other financial services easily communicate with each other.
Ethereum-based Raiden Network is focused on solving one of the main problems of blockchain technology, which is scalability. It enables fast, cheap, and scalable payment solutions for ERC20 tokens via a network of payment channels that provide secure off-chain value transfers.
Like many other crypto projects, Raiden is still in its development stage and aims to research state channel technology, define protocols, and develop reference implementations.
Decentralized exchanges and token swaps are challenging our current imperfect situation where you have to use the services of centralized exchanges to get access to cryptocurrency. Although DEXs still need to fix a few issues, such as low liquidity and complicated UX, the absence of KYC and fees as well as a few other benefits they offer are hard to resist.
Uniswap is a protocol for automated ERC20 token exchange that uses a formalized model for pooling liquidity reserves. A 0.3% liquidity provider fee is taken out of each trade and added to the reserves to make sure that the total combined reserve size increases after each trade.
Simple yet fast and efficient, the Uniswap protocol makes trade-offs, decentralization, censorship resistance, and security its main priorities.
AirSwap’s core principles include:
- No fees except a gas fee
- No deposits and full control of your funds exclusively by you
- No sign-ups, which means no sharing sensitive data with strangers
- Intuitivity and ease of use
- Security as a top priority
- Liquidity that allows you to place orders of any size and with no spending limits
When you wish to make a deal on the AirSwap network, bear in mind that each trade involves a person who sets a price, a ‘maker’, and a person who is willing to accept it, a ‘taker’. This is surely why makers should be visible to takers in order to finalize the deal. On AirSwap Instant the process is instant and automatic. Makers, on Instant, must stake 250 AirSwap tokens per trade intent.
The SALT platform provides cryptocurrency holders with the opportunity to use their holdings as collateral for cash loans.
Being one of the first asset-backed lending platforms, SALT offers liquidity without the necessity of selling your cryptocurrencies, and provides investors with a secure way to lend against a high-growth asset class via a fully-collateralized debt vehicle.
Augur is a decentralized oracle and P2P protocol for cryptocurrency users who wish to create their own prediction markets.
Augur enables the creation of any market whether it’s crypto, sports, politics, weather, or anything else you can think of. It is available for everyone regardless of their location.
All you need to do is pick an event or create one of your own, buy and sell shares, and, if you’re lucky enough, claim your rewards.
Bloom is working on creating a global, secure, and transparent credit infrastructure. This DeFi project offers an interesting blockchain-based solution for consumers to truly have ownership over their identity and financial data. The decentralized way in which this data is distributed reduces the risk of identity theft and minimizes onboarding, compliance, and fraud prevention costs.
Users are able to decide what data they wish to include in their BloomID and how it’s going to be used.
If your curiosity is not yet satisfied and you want to explore as many DeFi projects as possible, DeFi Prime has every possibility of becoming your new go-to place. It is a digital media and analytical service provider for the DeFi space that strives to inform, educate, and unite the community.
The platform lists all the major DeFi projects, provides up-to-date lending rates, notifies you about upcoming events, and even lets you connect your wallet to watch your portfolio and analyze DeFi holdings and stats.
If you compare the existing DeFi ecosystem to the traditional financial world, it won’t take too long to notice that it’s still in its infancy. However, Rome was not built in a day and neither was the banking industry. As Alex Pack, the managing partner at Dragonfly Capital, fairly noticed:
“The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way. You only get that shot every 50 years.”
Judging by the energetic attitude the majority of DeFi projects demonstrate, change is just around the corner.
As for Lumi Wallet, we are finalizing our last preparations before the big change. In the coming months, we will start a new chapter and go fully open source. This is an exciting journey that we’re happy to share with like-minded people, teams, and projects.
So if you feel that you’re going our way, feel free to reach out to us at firstname.lastname@example.org!