DeFi . definition
DeFi stands for Decentralized Finance or decentralized finance. DeFi is decentralized finance (or open finance). In it, organizations, markets or financial instruments are decentralized.
In order for investors to better understand the nature of DeFi, they need to know about CeFi (Centralized Finance).
What is CeFi?
CeFi is centralized finance, in which components such as institutions, trading markets or instruments are centrally managed.
In centralized finance, there is always the phrase “custodial” or entrustment. That is, financial assets, products and services will be entrusted to an organization.
Some forms of CeFi in the traditional financial market
In CeFi, all of the above components are active, interacting with each other through a 3rd party. Activities can be savings, loans, borrowings, transactions, transfer orders. , salary debt, bill payment, etc.
That third party can be a central bank, a government, a financial institution, or a large organization or force.
Advantages of CeFi:
- Familiar, accessible
- Protected by laws & institutions
Cons of CeFi:
- Must go through 3rd party intermediaries
- High cost
- The problem of transparency
- Not for everyone
Cryptos belonging to the CeFi group:
- Centralized exchanges: Coinbase, Binance, OKEx, Huobi.
- Forms of lending & Borrowing: Nexo, Celcius, Constant.
- Stable coins 1.0: USDT, USDC, PAX, HUSD, GUSD.
A huge limitation of traditional finance is the centralization or concentration of power. DeFi is the solution for this.
What is DeFi?
DeFi is a decentralized finance (or open finance) platform in which institutions, markets or financial instruments are managed decentralized. DeFi leverages the power of Blockchain to be decentralized and transparent to create an open finance in which anyone can access and use it anywhere, anytime without incurring any costs. governed by individuals or organizations with centralized authority. In DeFi always comes with “Non-Custodial” ie no entrustment.
Thanks to this feature of DeFi, investors are also known as Open Finance or open finance.
Products and projects in DeFi are also fully similar to those of CeFi:
In DeFi, there are also operations similar to CeFi. Be it savings, loans, borrowings, transactions, transfer orders, debt, bill payments, etc. Instead of being processed through an intermediary 3rd party, those operations take place on the blockchain’s Smart contract.
Compare DeFi vs CeFi
The biggest difference between traditional finance and decentralized finance is trustworthiness.
- In traditional finance or Traditional Finance: Institutions, markets & financial instruments always exist intermediaries with centralized power
- Meanwhile, DeFi leverages Blockchain’s power of transparency and decentralization to eliminate these intermediaries.
- Governments or banks (CeFi) will be replaced by decentralized blockchains.
- CeFi assets will be replaced with tokens that are part of the Blockchain ecosystem. They are decentralized.
And DeFi’s mission is to provide access to financial services to users anywhere, anytime as long as they have the Internet. DeFi’s openness is evident here.
In fact, DeFi has been developing very quickly, all products and services in CeFi can be replaced by DeFi applications. This is the practical application and makes the most of the power of blockchain (decentralization).
The essence of DeFi
DeFi is the most practical application of blockchain, taking advantage of the advantages of blockchain. Consists of:
- Transparency (Transparent).
DeFi properties also inherit from blockchain.
- Decentralized Decentralization.
- No Permissionless permission required.
- No need to put trust but still ensure Trustless safety.
- Transparency Transparent.
- No Self-Custody entrustment required.
3rd parties at this time are not organizations, banks, or governments (who can control us). Blockchain’s smart contract will take over that role.
Components of DeFi
Before you read the important components of DeFi below, I want to update some of the very clear changes and differentiation of DeFi right now.
- Yearn (YFI) “eats” & acquires other DeFi projects to expand into a comprehensive DeFi ecosystem. This ecosystem is growing very fast, every project integrated with YFI achieves huge ROI. A small tip is that you should carefully read the article about Andre, to see what the ecosystem is missing, which projects will be added next.
- The Oracle trend is still continuing with a lot of new projects following this segment.
- DeFi changes quickly, me and my team compiled a series of articles about what happened in DeFi during a week, you can read more at: DeFi Weekly.
Before talking about the details of the components of DeFi 2020, I want to share the image of the DeFi 2019 ecosystem (in this article 1 year ago), to help you see its differentiation & development. .
DeFi 2019 components:
- Lending & Borrowing platform.
- DEX (Decentralized Exchanges).
- Decentralized stablecoins.
- Payment (Decentralized forms of payment).
- Derivatives (Decentralized derivative projects).
These are stablecoins 2.0. Generation 1.0 are stablecoins issued as collateral against centralized commodities such as USD dollars, gold (USDT, USDC, TUSD,..) And Stablecoin 2.0 (Decentralized Stablecoins) is issued against the collateral of other cryptocurrencies (DeFi).
Simply, investors can mortgage their crypto to issue stablecoins (with a smaller amount). In such projects, there is usually a governance token, called a Governance token. This is the token that investors can aim for.
Decentralized Lending and Borrowing
Decentralized lending & borrowing platform.
This is a form of coverage for users in DeFi applications.
Decentralized Exchanges (DEX)
Decentralized exchanges, developed since 2017. Up to now, they are also divided into different types:
- DEX 2017 – 2018: Kyber (KNC), Loopring (LRC), Bancor (BNT)
- DEX 2020: DEX Serum (SRM), Sushiswap (SUSHI), Uniswap (UNI), 1Inch, Balancer (BAL), Curve (CRV)
The form that allows users to make a profit by providing coin liquidity to the exchange. In return, participants will receive a reward (usually) of governance tokens. This form is very popular since July 2020 and is often accompanied by the keyword Yield Farming.
Oracle is a system that provides real-time data for blockchains and smart contracts. Thanks to Oracle, blockchain and smart contracts (on-chain) can interact with external data (off-chain).
Decentralized derivative products: Synthetix (SNX), Opium, Opyn, Hegic (HEGIC), UMA.
Synthetic assets: Synthetix, Tokenlong, UMA
Some DeFi Teams in 2020
As projects that provide ecosystems & different solutions, not just a separate product: Hakka Finance (HAKKA), Yearn (YFI), Alpha Finance (ALPHA), Cream Finance (CREAM)
Decentralized Prediction Market
Including projects: Open Predict, Augur (REP), PlotX (PLOT), Decentralized Insurance (decentralized insurance).
DeFi ecosystem on every blockchain platform
If you look closely, you will see that each blockchain project is trying to build their own DeFi ecosystem. And based on the number of DeFi projects built on each blockchain, we will know the growth of that blockchain.
Currently, Ethereum is the blockchain with the most projects built on. Then to Binance smartchain, Tron,..
However, at the moment, Binance Smartchain has been able to surpass Ethereum and in the near future there may be more Solana platform entering the game of kings.
DeFi in 2020
When it comes to DeFi, investors all remember the TVL index, which stands for Total Value Locked, ie the total amount of assets locked in DeFi applications. The larger this number, the more attractive DeFi is to users.
Figures for November 21, 2020
Within 1 year, TVL grew 1,178% (nearly x12) times and is now at $13.98B. This volume of TVL accounts for 2.6% of the total Market Cap. This number may be small compared to the general Market Cap. With a growth rate of nearly x12 within 1 year, if DeFi maintains this rate, TVL in my opinion will not stop at 2.6%. It is the potential that investors can easily see in the near future. However, the TVL index is not completely correct.
But in fact the following DeFi projects stand out: YFI, KNC, HAKKA, ALPHA, Binance DEX, Serum (SRM) has only developed and served the community in the crypto market. There are currently a number of projects open to the outside community and investors are looking forward to those projects.
Source: World Bank
Currently, 1.7 billion people have a bank account. And the question is If DeFi can take advantage of it and be embraced by the above 1.7 billion people, how big will DeFi’s growth be?
Names in the village of DeFi
Coinbase Ventures – Open Finance
Coinbase exchange previously released a list of projects in their Open Finance portfolio.
In it, investors can see many familiar names such as: Compound (COMP), Graph (GRT), Reserve (RSR), UMA, CELO, Dharma, Near Protocol. They are all DeFi projects invested by Coinbase Ventures.
There are also many other projects that do not have tokens or have tokens but have not been posted to Coinbase. This is also an opportunity for investors to be extremely risky in the coins and pump when official news is available.
Binance Smart Chain
While a lot of projects built on popular blockchain platforms like Ethereum are launched. Binance is again focusing on developing their own blockchain, Binance Smart Chain (BSC). Then from September 2020, we see a series of DeFi projects launched on this blockchain.
In terms of level, the projects on BSC are doing very well. Especially, the growth has returned from the beginning of November 2020. Currently, it can be said that Binance Smart Chain is reaching the top of the DeFi ecosystem.
The following projects are all expected to grow significantly again: Alpha, Pancakeswap (CAKE), Venus (XVS), Burgerswap (BURGER), Spartan Protocol (SPARTA), Bakery (BAKE).
Huobi Finance Chain
Since the end of 2019, Huobi has mentioned Huobi Finance Chain. However, people are only interested when this blockchain of Huobi is launched in Public Beta when combined with Nervos (CKB) – another platform blockchain.
Solana is a blockchain platform that was first uploaded to Binance in April 2020. Although new, their development speed and development team are very fast & efficient.
Serum (SRM) is one of the first DApps built on Solana, and it is also a DeFi application. There are also other projects being built & integrated into the Solana ecosystem.
The number of DApps is still small, but in terms of the growth rate and capacity of the project, the potential for Solana’s DeFi ecosystem in the future is still very much.
Maybe in the near future Solana will be an extremely powerful platform and can surpass even Binance Smart Chain.
DeFi is a huge trend in the Crypto market so if any investor is really passionate about Blockchain technology, let’s dig deeper it is a place worth investing.
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