In this article, we are going to touch upon various decentralized services (DeFi) that have shaked the ground of the crypto space and become extremely popular among the crypto community. We do not pretend to create a sterling typology though. Let's start. What is DeFi?
Decentralized Finance (DeFi) is an open-source and trustless ecosystem of financial services based on public blockchains, predominantly Ethereum. Other networks include Polkadot, Binance Smart Chain, and NEO.
The DeFi ecosystem encompasses all aspects of financial services and transactions, including lending, borrowing, and trading within decentralized protocols. Any user can interact with the ecosystem and manage assets through P2P and dApps. The reasons behind the DeFi's hype
If Bitcoin is a peer-to-peer electronic money system, then DeFi is a peer-to-peer electronic financial instrument system. A decentralized finance ecosystem can provide anyone with access to traditional financial services, eliminating the need for intermediaries and lowering barriers to entry.
To put it short, there were at least three reasons that affected this uprise of the DeFi services:
- Liquidity. Tons of millions in USD equivalents were still locked in assets like Bitcoin, Ether, etc, so the only way to deal with them was trading. DeFi brought lots of perspectives like: lending, borrowing, derivatives and more.
- Better UX. To start trading crypto financial assets, one should pass a long KYC requirements, provide personal information, and wait for approval. With the case of Uniswap — one of the most popular decentralized exchanges, one only needs to connect a wallet via Metamask and start swapping.
- Opportunities. For professional players, the imperfection of the DeFi protocols offer tremendous opportunities for arbitrage across multiple platforms (as in the early development of crypto exchanges). Hence so many stories take place like a single user took advantage of a loophole in the protocol and turned $200 into ETH into $20,000.
DeFi applications and services are potentially useful for residents of countries with underdeveloped or unstable economies. DeFi services are also in demand in developed countries, especially in the field of lending, investment and the development of new models of income generation. An attempt on an imperfect typology of the DeFi services
The DeFi ecosystem is booming. It is bringing more users to the crypto world. One cannot deny that DeFi is doing what ICOs did in 2018. It is bringing the spotlight back to the crypto world again. The trading element of the DeFi ecosystem plays a very important role in this growth. So, who are the main players within the trading element of the DeFi sector?
A decentralized exchange (DEX) is a blockchain-based exchange that does not store users' funds and personal data on its servers and acts solely as a platform for matching orders to buy or sell assets.
Decentralized exchanges offer a new model for trading and exchanging assets, eliminating KYC procedures, dependence on a single intermediary, and oligopoly (a market with a limited number of large players).
One of the most successful and actively developing decentralized exchanges is Uniswap, which combines trading and lending / granting options. Other popular DEXs and protocols include IDEX, 0x, AirSwap, Bancor, Kyber, Paradex, Radar Relay, Loopring.
- Decentralized Stablecoins
Before we dive deep into the topic of decentralized stablecoins, Let's do a quick recap about stablecoins. So, what exactly is a stablecoin? It is a type of cryptocurrency, but the value of stablecoin is pegged to a fiat sometime of a country or multiple national currencies unlike the majority of cryptocurrencies.
Let's take for example the MakerDAO project. It is an Ethereum-based smart contract platform. On its basis, the decentralized stablecoin Dai was created. Dai's issuing scheme can be compared to issuing money backed by gold, but the difference is that a bunch of assets is used instead. The user sends a certain amount of ETH or other ERC20 tokens to the smart contract. This type of smart contract is called Collateralized Debt Position. Maker uses two tokens: Dai and MKR. MKR is a utility governance token of the protocol.
The synthetic assets aim to provide users with access to many different assets without having to hold the underlying asset. This can be anything from fiat currencies like the US dollar or Japanese yen, to commodities like gold and silver, as well as index funds or other digital assets. They have lots in common with stablecoins described above, but since their value is not directly pegged and can vary in time, it's considered as a separated type of DeFi.
By using these unique synthetics, investors can own tokens that track the value of certain assets without having to leave the cryptocurrency ecosystem. Cryptocurrency synthetic assets also offer users all the benefits of decentralization, as they are open to all users abroad using secure smart contracts and other tools, and the data is stored in distributed ledgers.
Among prominent projects are Synthetix and UMA. The Synthetix team is developing a protocol that allows the creation and release of synthetic assets, whereas UMA (Universal Market Access) develops a derivatives platform to provide financial products with standardized contracts. Prediction Markets and Other Types
Prediction market platforms and applications rely on the wisdom of the crowd to determine the likelihood of a particular outcome. The data of modern scientific research support the notion that a large number of people ("crowd") always predict the consequences of certain events with greater accuracy than individual experts.
The Numerai platform is a hedge fund that uses AI to find the most efficient ways to trade securities. The fund's employees - data processing and analysis specialists - create algorithms for predicting transactions and place bets on their predictions using NMR tokens. The amount of remuneration is determined by the accuracy of the forecast and the amount of the bet.
Among other DeFi types security tokenization platforms, wealth/assets management platforms and escrow services can be present. The CUTcoin vision
As discussed in our CNT-1 whitepaper, we see a tremendous need in privacy-focused techs in DeFi services. For instance, existing stablecoins, including Dai, provide an extremely low level of confidentiality, since all transactions and account balances are held publicly.
On public blockchain networks like Bitcoin and Ethereum, the history of every single transaction and wallet can be viewed. That's is partly okay since some kind of AML & law enforcement must be enacted to keep the crypto space in regulatory frameworks. However, the biggest pitfall of such a system is that the lack of privacy can intrigue malicious entities and thus affect the life of credible, law abiding individuals. A healthy attitude towards both the rule of law and privacy is the future of finance, cryptocurrencies and DeFi. This is something the CUTcoin team is up to and always has been for.