DeFi, decentralized financial tokens are becoming popular. What’s the difference between decentralized financial tokens and the existing traditional financial institutions?
What are DeFi tokens? Table of Contents
What is decentralized financial (DeFi) token
Cryptocurrencies were developed to meet the demand for payment systems that allow banks to easily access their financial services anywhere in the world, regardless of nationality.
And this demand goes even further by building an application called decentralized finance (DeFi) that does not require central bank intervention.
DeFi seeks to create financial services at financial institutions such as financial transactions, lending, savings and insurance on a global scale.
What’s more, this new application will allow anyone to access current financial services through smartphones and the Internet.
What is the importance of DeFi?
DeFi is built on the basis of a mechanism called a smart contract that automatically executes contracts on the blockchain.
Smart contracts are defined as programmable money that automates finance, most of which is used in the Ethereum network.
In order for smart contracts to work, the preset contract details and their execution conditions must match.
These smart contracts use very complex algorithms to ensure information security without the need for human intervention in the Transaction process.
These programs are commonly referred to as Decentralized Applications (dApps), which means applications that are delivered without a central administrator (autonomous decentralized applications).
What’s the difference between DeFi and traditional financial institutions?
The services provided by the DeFi application differ from the services of existing financial institutions such as Wall Street as follows.
First, there is no need for financial institutions or their employees to operate the application.
When smart contracts are deployed on the blockchain, DeFi applications run with little human intervention.
On the blockchain, once the smart contract is deployed, the source code cannot be tampered with, so it is highly transparent and can be monitored by any user.
Since it is developed in open source in this way, anyone can know the functionality of the contract and the existence of bugs, detect defects at an early stage, and improve safety.
For this reason, dApps has earned a great deal of trust among users.
Most DeFi applications are designed so that you can trade from anywhere in the world as soon as you start using them, as long as you can use the Internet and mobile devices.
DeFi applications do not require permission.
Unlike current financial institution services, you don’t need to submit multiple documents or admins.
Anyone can create an application and anyone can use it.
Which DeFi tokens are popular?
In proportion to the growing interest in DeFi, the trading of DeFi tokens is also receiving a lot of attention.
DeFi’s assets under custody soared from $ 2.1 million to $ 6.9 billion between 2017 and August 2020.
We would like to introduce four of the most popular DeFi tokens in the enthusiastic DeFi market.
1. WBTUSD (Wrapped Bitcoin)
Wrapped Bitcoin (WBTC) is a bitcoin tokenized on Etherium.
Since WBTC complies with the ERC20 standard, it can be used on the Ethereum blockchain.
Since WBTC is integrated into the Ethereum ecosystem, Bitcoin holders who previously could not use the financial system on Ethereum by using WBTC used smart contracts, a lending platform, decentralized exchange ( Applications such as DEX) and Prediction Markets are now available.
WBTC and Bitcoin are pegged 1: 1 and the issuance method is to deposit Bitcoin with a custodian, issue WBTC in exchange for it, and hand it over to the seller (issuer).
This method keeps the exchange price between Bitcoin and WBTC constant and may increase the liquidity of the decentralized financial system as Bitcoin funds flow into the Ethereum ecosystem through WBTC.
2. LNKUSD (Chainlink)
Chainlink (LINK) is a platform based on blockchain technology built to bridge the barrier between smart contracts and external functions other than blockchain (bank payments, etc.).
The basic purpose of LINK is to act as a middleware that bridges these two environments, on-chain and off-chain.
The blockchain cannot access data outside the network.
Therefore, external data may be required to execute DeFi smart contracts.
It is Oracle that connects smart contracts with various data outside the black chain with LNKUSD.
Oracle network developers call LNKUSD an ERC20 token with a “transfer and call” feature.
In previous versions, if you used ERC20 tokens and sent the tokens by mistake, you could not get a refund.
However, after the improvement, it became possible to cancel the token that was sent incorrectly, and it became possible to process and accept the contract in one exchange.
3. ZRXUSD (0x)
ZRX (0x) is a DEX protocol that functions as infrastructure because DEX is realized using 0x as a platform.
The 0x protocol allows users to trade ERC20 on the Ethereum blockchain without the intervention of a centralized exchange.
A feature of 0x is that it supports non-substitutable tokens (ERC723) as well as substitutable tokens, allowing traders to use 0x to buy, sell or exchange various Ethereum assets.
Trading using 0x is active at over-the-counter trading desks, digital service and goods trading marketplaces, and DEX.
4. RENUSD (Ren)
Ren is an open-source protocol that connects various blockchains to provide interoperable liquidity between platforms.
Ren can be used to transfer any token between any blockchain, making it easier to participate in DeFi projects.
Ren allows users to exchange tokens between two blockchains without worrying about whether they are wrapped tokens.
There are various costs charged to using Ren, most of which are paid to miners.
The soaring BTC price in 2020 has also helped, and DeFi tokens are getting a lot of attention.
However, DeFi tokens are still developing and there are many unknown areas, and proper risk management is essential for their transactions.
When you open a position and make a transaction, please be sure to do your own research and collect information such as new announcements and updates.
Comment by Hans
April 24, 2024
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