What is DeFi (Decentralized Finance)? How to make profits with DeFi?

DeFi, Decentralized Finance

It’s no exaggeration to say that DeFi is one of the hottest words of 2020. This is especially true in the cryptocurrency market. The DeFi Token is one of the biggest performing digital assets of 2020, and many have benefited greatly from the DeFi Token. However, cryptocurrency traders are still struggling to understand what DeFi is.

DeFi is an acronym for Decentralized Finance and applies the concept of decentralization of cryptocurrency to the financial world. A variety of DeFi applications built on the blockchain of cryptocurrency provide a variety of financial services including insurance, loans, savings and trading.

DeFi, like cryptocurrencies, eliminates the need for centralized financial institutions. However, the way DeFi works is still unfamiliar to even experienced traders. So, let’s take a look at how DeFi works and whether you can really make money with DeFi.

What is DeFi on StormGain? How does it work?

How does DeFi work?

Traditional financial services have always relied on centralized institutions. In other words, you had to go to the bank to get a loan. In this respect, DeFi changes everything.

DeFi is an open financial system that facilitates peer-to-peer (P2P), i.e., peer-to-peer financial services through blockchain technology and gives people full control over their assets. You can use the P2P system through DeFi right now. By using this service, you will be able to get a loan with your smartphone from a stranger living on the other side of the world.

The agreement for that contract can be written in blockchain code through a smart contract. So if the loan conditions are met, you will be able to get the funds. This is just one of the many features offered by dApps (Decentralized Applications). These applications behave just like regular applications, except that they are based on a single entity and are completely distributed without centralized control.

How was DeFi created?

The term DeFi was first coined in August 2018 in a Telegram chat between entrepreneurs and Ethereum developers. The topic of the conversation was how open-source finance-based applications could be built on the Ethereum blockchain. This is where the term Decentralized Finance, or DeFi, was born.

The first DeFi app was in 2017, a year before the launch of MakerDAO. Users can borrow Dai (with Ether as collateral), opening the door to lending money without going through a central authority.

Since then, the DeFi ecosystem has grown exponentially, with another protocol focused on lending being launched in 2018. Among them was Uniswap, which allows the exchange of ERC-20 (a token on the Ethereum blockchain). And Uniswap is currently one of the largest dApps in use by many.

DeFi continued to grow throughout 2019, but 2020 will be remembered as a rather bleak year for the DeFi market to explode.

For generalization, DeFi’s dApps now have various functions such as DEXes, insurance, payment, and loans.

What is dApps (Decentralized Application)?

Like most cryptocurrencies, dApps run on a blockchain, and most are open source. This means that only one person can have ownership, so others can build on top of records created by existing systems. Encryption allows information to be shared over a network. This process is essential to ensure the safety of the blockchain.

Types of dApp

There are different types of dApps to meet the various needs of users. Here are some key dApp types.

Loan dApps

Loan dApps allow you to lend or receive virtual currency loans. Loan contracts are made through smart contracts. From the lender’s point of view, the advantage of using these dApps is that they can earn interest on the cryptocurrency they lend. Also, there is little risk of losing your assets due to excess collateral.

From the borrower’s point of view, these dApps do not require a credit check and have the advantage of low transaction fees and instant payments.

Decentralized Exchanges

Decentralized exchanges (DEXes) allow users to trade digital assets with each other without the need to hold or deposit funds in a central institution. After users connect their wallets to an exchange, they directly verify that the transaction is valid.

Uniswap, a popular index, allows users to provide liquidity to exchanges in order to receive an incentive (a fraction of the transaction fees shared among all liquidity providers). Use this method to add a liquidity pool This eliminates the problem of relying on market manufacturers to provide liquidity, which is impractical on the Ethereum blockchain due to its low transaction throughput.

Dex asset prices are usually determined by automated market makers (AMMs). These are protocols recorded in smart contracts on the blockchain that use mathematical formulas for pricing.

The advantage of DEX is that transaction fees are also minimized with minimal maintenance. Also, as long as smart contracts are solid, DEX is considered very secure.

The downside of DEX is that compared to more established centralized trading (like Bybit offers derivatives and margin trading), DEX often doesn’t offer a wide variety of trading.

Invest in DeFi with Bybit

Insurance dApps

Investors can enjoy peace of mind while insuring their digital assets. For example, you can include something about a bug in a smart contract or a hack into the blockchain. Some dApps also offer insurance solutions for real-world events in the usual way, such as flight delays.

Payment dApps

DeFi provides secure payment solutions for individuals and businesses through open source technology. Blockchain technology prevents fraud, provides banking services to people who have not previously done banking, and allows them to make payments with other cryptocurrencies and digital tokens. The best thing about payment dApps is that they can process payments.

Market Forecast dApps

When you want to predict the outcome of an event to make money, a market prediction dApp can provide a solution. The market forecasting dApp allows you to make predictions about elections, sporting events, and even cryptocurrency markets.

Stablecoin

A stablecoin is a cryptocurrency pegged to the price of a stable asset such as the US dollar. By ensuring price stability and low volatility (two factors infamous for hurting the cryptocurrency market), users can trade in dApps with confidence.

Stablecoins play a fundamental role in various areas of DeFi. One of them is in liquidity pools. The stability of stablecoins is preferred as it increases liquidity. In addition, the low volatility of stablecoins allows DeFi investors to see steady returns.

Purse dApps

dApps require users to have space to store their cryptocurrencies and tokens. You can additionally download this feature from your Internet browser. Users can also synchronize their wallet dApps with other dApps to make transactions quickly and easily.

Token to perform transactions in dApps

Tokens (not real cryptocurrencies) are required to conduct transactions on the dApp. On the Ethereum network, you can access these tokens using Ether. For example, it’s like using real money to get tokens on a gaming machine. Similar to using tokens to play games, tokens are used to spend dApps in several ways. Like cryptocurrencies, tokens can be traded and their value can fluctuate.

Tokens can have different functions in one dApp, and some can be categorized into more than one category:

Application Token

This token provides access to aApp products or services.

Governance Tokens

These tokens help control the protocol of the dApp. For example, if a decision is required regarding a change within a dApp, stakeholders can vote on the implementation of that matter.

Transaction tokens

These tokens are used to pay for goods and services in aApps.

Security Tokens

These tokens are used as a form of investment in the same way as traditional securities such as stocks or bonds.

Ethereum network hosts dApps

The Ethereum network hosts the majority of dApps (including dApps with a significant few on other networks such as EOS, NEO, and Tron). Launched in 2015, the company’s founder, Vitalibuterin, predicted that the Bitcoin network had its limits for building dApps, and that Ethereum would create value beyond just a digital currency.

The more advanced technology of Ethereum (compared to Bitcoin) made it possible to implement these dApps. However, with the launch of more sophisticated dApps, the Ethereum network faces scalability issues to meet additional demand. However, an Ethereum 2.0 upgrade on the network is likely to solve this problem.

How to make money with DeFi?

You can make money with your DeFi investments. However, as with everything when it comes to making money, investing in DeFi comes with risks.

There are several ways for investors to earn unearned income through DeFi.

1, Generate interest income through interest farming

As mentioned earlier, interest farming is one of the main ways to earn money through DeFi. Like DeFi, moving farming is still a relatively new concept, but it has exploded in popularity by the summer of 2020.

This includes lending crypto assets such as ERC-20 tokens and stablecoins for the purpose of providing liquidity to the DeFi ecosystem. Interest farming is done in the dApp, and users receive a fee or interest on cryptocurrency in return. Next, let’s take a look at some of the most popular platforms where you can participate in interest farming.

Compound Finance

Compound Finance is one of the most popular platforms for farming interest in a relatively simple way. To incentivize the use of dApps (providing liquidity), users receive COMP tokens associated with the dApp (the more they spend, the more tokens they earn) Investors hope that the value of the token will rise over the long term.

In the case of COMP, it ran large-scale in a short time. COMP launched at a price of $61 on June 18, 2020, and then skyrocketed to $372 on June 21, 2020. Since then, the price has gone down and is stable at the $100 level (as of early November 2020). However, there have been several price spikes in the meantime. (The biggest price spike was in early September when it crossed the $250 mark.)

Abraham open-source Defy Protocol

Aave is another popular platform for interest farmers. Ave is a decentralized protocol for lending or borrowing tokens. The interest rate is determined by an algorithm based on market conditions. The token lender starts receiving interest as soon as the token is loaned out.

Uniswap

As a decentralized exchange protocol, users can easily exchange tokens using Uniswap. In other words, liquidity providers can earn commissions on the Uniswap platform by providing liquidity to the liquidity pool. For example, liquidity providers earn 0.3% of their transaction fees just by enabling a particular liquidity pool.

Contrary to the advantages of uniswap, any transaction involving interest farming carries a set of risks. This is especially true when smart contracts have a lot of bugs. This was the case with the token YAM in August 2020. There was a bug when Uniswap had over $400 million in yams. After that, the price of yam plummeted from over $100 to around $1.

DeFi hasn’t (yet) seen this setback, but it’s worth noting that what happened to Yam could happen again. A moment’s greed can lead to long-suffering. Because the price could soar to unsustainable levels. This is a repeated phrase on Bybeat, but it cannot be overemphasized, so I’ll say it again: you have to do your own research! Examine the advantages of the DeFi project for yourself.

Incidentally, interest farming is not for beginners. Although we have described interest farming from a layman’s point of view, it requires a lot of technical knowledge to be truly successful in interest farming. If you don’t know what you’re doing, you can easily lose money.

2. dApp PoolTogether Lottery

You may not make money, but you will not lose money either. If you win, that’s good, if you don’t, you get your money back. dApp Together is a lottery that never loses. Built on the Ethereum blockchain using Dai (DAI), users will receive one lottery ticket for every dollar spent. This is possible because the prize money does not come from funds raised by lottery purchases. It raises its prize money with interest raised from money deposited in the pool.

What is DeFi’s future?

So, is DeFi the future of finance? Or is it just a fad?

The DeFi boom is already showing signs of shrinking. However, this was inevitable. The real question is whether DeFi will crash or will it stabilize and reach a level of long-term sustainability.

For DeFi to reach that level, several fundamental issues need to be addressed. The first is security. Problems such as smart contract bugs remain a major concern for users and investors. The issue of smart contract security is being addressed directly with the growth of smart contract insurance dApps. This is a time when contingencies such as smart contract bugs can lead to loss of potential assets. These kinds of dApps also provide protection against hacking. Hacking is rare, but unfortunately not entirely. For example, in April 2020, $25 million in cryptocurrency was stolen from a dApp Lendf.Me loan.

Also, as with cryptocurrencies, regulatory concerns remain. Currently, there are very few regulations on the DeFi project, so there is a possibility that something that was not illegal before will suddenly become illegal because regulations that did not exist in a short time are created. However, industry-wide regulation will increase the credibility of DeFi in the long run.

With concerns about global economies of scale unlikely to dissipate anytime soon, stablecoins have great potential as their use may expand over the next few years. Hyperinflationary countries such as Venezuela have adopted stablecoins early, and this trend is likely to continue.

DeFi has the potential to revolutionize the financial industry as we know it. People no longer have to rely on a central authority for loans, insurance, and payments. The decentralized blockchain technology makes the use of DeFi DApps very secure. However, security concerns remain, such as bugs in smart contracts, longer processing times, and the possibility of hacking. Therefore, these issues must be addressed in order for DeFi to continue its healthy growth. Also, as already mentioned earlier, the explosion of DeFi dApps has created scalability issues. However, there is hope that Ethereum 2.0 will solve this.

Investors may be interested in the possibility of making money with DeFi. Because there are real cases of making money with DeFi. However, you should approach DeFi with caution. Interest farming is not for beginners, and knowledge and research are required to master interest farming and use it effectively. It remains to be seen whether DeFi will be able to fully acquire Centralized Finance (CeFi). However, if risk mitigation procedures are in place, DeFi will become mainstream. Because DeFi has a lot of potentials.

Invest in DeFi with Bybit

Terms you need to know to understand DeFi

Here are some key terms related to DeFi:

Decentralization (Decentralized)

As the name DeFi (Decentralized Finance) suggests, DeFi provides a decentralized alternative to centralized financial infrastructure. It is the nature of decentralization to separate the planning and decision-making process from the regulatory authorities or central group.

dApps: decentralization app

dApps are the backbone of DFi. dApps work in the same way as regular apps but are not run by a single authority. In DeFi, dApps have a variety of functions, including loans, insurance, payments, and more.

Dex: decentralized exchange

As previously described, DEXes allow users to exchange digital assets peer-to-peer, i.e. peer-to-peer. In contrast to centralized trading, individuals always have full control over their funds.

Liquidity Pools

Liquidity pools eliminate the need for DEXes to depend on market makers for liquidity. Instead, users create liquidity in exchange for incentives. Incentives can be transaction fees, interest, bonuses, or other incentives specific to the exchange.

Money Legos

Just as lego is associative (which can be put together in different ways), so is DeFi’s dApp. This means that different dApps can be combined and linked to using different functions.

Open-Source

Most DeFi dApps are open source. This means that anyone can view, interact with, and, if necessary, dig deeper into the coding.

Oracle

An oracle is used in the blockchain to provide information from outside to smart contracts. Since smart contracts do not have access to data on their own, oracles are essential for smart contracts to work. The information provided by the oracle tells us that smart contracts can be executed.

Over-Collateralization

Excess collateral is an integral part of the DeFi infrastructure. When no credit check is done, an over-secured loan is a form of insurance in case the lender does not execute the loan on the dApp. However, DeFi requires excess collateral, which is a major difference from normal collateral for loans. This means that the lender will need to put in more assets than the loan itself is worth. The minimum collateral ratio is 150%. For example, if someone wants to borrow $200 in DAI, they will need $300 in Ether as collateral. This is to protect borrowers from potential price fluctuations in the market.

Permissionless

Anyone can participate in DeFi. A bank account is not required. All you need is internet to use the dapp.

Smart Contracts

A smart contract is a self-executing contract written in the code of a blockchain. Smart contracts are only executed when specific rules are met. Examples of this include loan contracts, insurance contracts, and home sales.

Token screen (Tokenization)

Tokenization is the process of converting physical assets, such as loans or real estate, into digital data that can be stored on a blockchain. By not going through an intermediary, tokenization eliminates many of the overhead and administrative costs required by traditional procedures.

Deposited Assets

Deposited Assets (TVL) is a unit of measure used to measure the size of the DeFi industry. Deposited Assets, or TVL, refers to the total amount (in dollars) of assets deposited in DeFi, a financial platform. For example, this asset could be liquidity in a trading pool of DEXes or a loan amount in a lending dApp. In 2020, DeFi’s TVL increased significantly. It was around $600 million in January 2020, but has soared to over $11 billion by November 2020.

Yield Farming

Interest farming is one way to make money while supporting the DeFi ecosystem through token lending or trading. As an interest farmer, you will provide ‘liquidity to the liquidity pool through a basic mechanism instead of being incentivized.