Decentralized Finance: The Next Big Thing in the Decentralized Space

Vandana  |  Jun 26, 2020

In today’s world of rapidly growing digital currencies and its adoption, Decentralized Finance (DeFi) is playing a major role in order to increase the accessibility of such currencies. The major purpose of DeFi is to make financial services accessible to everyone out there without the need for a centralized bank or traditional financial system. It has been seen that in the year 2019, there has been a subsequent growth in DeFi including a very wide adoption.

How decentralized is DeFi?

People can see DeFi as an ultimate alternative to all the banking needs like savings, insurance, loans and a lot more things. You will have access to all of these things in just one app on your phone which is completely decentralized and not controlled by anyone central authority or entity. To see how decentralized is DeFi one needs to make sure that it has been completely developed using decentralized technology. This simply means that there is not any kind of involvement of any central enterprises. To increase the availability and make it more accessible to people across the world, decentralized apps (Dapps) have been developed using the same technology.

Here are a few points which will make it clear that how decentralised is DeFi Dapps are:

  • One of the major things is that DeFi Dapps are not managed by any particular firm as they run automatically using smart contracts. It does not require any kind of third party involvement for its operation.
  • Another thing that contributes towards its decentralization is that it is completely transparent which means anyone can easily check and evaluate which builds up the trust among the users. Anyone can view the transaction activity which does not even reveal the real identity of the users to make sure that their privacy is intact.
  • Globalization could be counted among other reasons as anyone from across the world can have access to the same Defi services.
  • How DeFi works on Ethereum Blockchain?

    It is quite obvious that whenever there is any mention of DeFi then Ethereum comes first in the mind of most of the people. Out of total DeFi projects, 199 DeFi projects have been built on Ethereum blockchain. One of the major concepts of DeFi on Ethereum Blockchain is Collateral Debt Position.

    Collateral Debt Position

    Collateral Debt Position (CDP) could be understood as a smart contract which runs on the Ethereum blockchain and one of the major components of the Sai Stablecoin system. CDP is needed to create Sai during the time when new assets are leveraged and while creating the new one, it destroys the existing one. This technology was created by MakerDAO back in 2014 in order to develop the Dai Stablecoin and along with this, it helps the tokens to stay connected with the US Dollar using feedback.

    The major reason behind introducing stablecoin was to bring stability in a highly volatile market and with this, it opens the gate for some huge financial possibilities. Dai is there to offer stabilization, decentralization and transparency, the reason being that it has been built on the top of Ethereum blockchain. Target Rate Feedback Mechanism (TRFM) plays a major role behind making Dai a stablecoin. In order to maintain the stability on the network, Dai employs TRFM. Along with this, it plays a major role in maintaining the price of Dai at $1 as whenever the price of Dai goes below $1, TRFM increases and it ultimately pushes Dai back to its original price.

    The increasing popularity of DeFi projects

    Over time, it is quite evident that how DeFi projects grew rapidly but a tremendous increase in its popularity has been seen by the end of 2019 and in the starting of 2020. Several data analytics reveals that in the first quarter of 2020, there has been a huge increase in the whole DeFi ecosystem, despite the crypto market crash of March 2020. In the transaction volumes across the whole DeFi projects, there has been a huge increase by around 800% as compared to the first quarter of 2019. It has also been revealed that a huge part of this growth belongs to projects like Maker and Compound. The whole data indicates that people are now moving more towards the DeFi projects which clearly means that the popularity of such projects is increasing rapidly.

    This popularity and increasing adoption of DeFi is quite evident as some major tokens have now started moving towards ERC-20 tokens in order to have access to DeFi. There have been a lot of efforts to inject Bitcoin into the DeFi ecosystem. People are trying to create a collateralized Bitcoin ERC-20 token which is the standard Ethereum token.

    Top DeFi Protocols powered by Ethereum 

    With the increase in popularity and adoption of DeFi, there has been a huge increase in DeFi protocols as well. Here are few of the top DeFi protocols which are powered by Ethereum:

    MakerDAO

    MakerDAO, a decentralized lending platform is currently one of the most prominent DeFi applications which is there in the market. It uses CDP in order to create stablecoin, Dai as mentioned above. Dai stablecoin can be easily used to trade, make payments, to invest and many other things in a completely decentralized way. It has been reported that around 60% of the total digital assets which worth around $600 million are there with Maker. 

    Compound 

    Compound is another major DeFi protocol which simply helps the investors to borrow or lend the crypto against the collateral. The protocol has locked up around $128.4 million in the liquidity pools. With this, it has been seen that Compound has emerged as the highly popular protocol in the whole DeFi ecosystem. It allows the users to earn interest when they add digital assets to the platform.

    Dharma

    Dharma is again an open-source lending platform which has been developed on Compound protocol. It provides a non-custodial smart wallet with the help of which the holders can have easy access to the DeFi lending markets. In the DeFi ecosystem, Dharma also holds quite a good position among other DeFi protocols available in the market.

    Conclusion

    Through this overall analysis, it is quite clear that DeFi is holding a prominent position in the crypto market these days. People have started moving more towards DeFi or you can say open finance and the popularity of DeFi Dapps has increased to a very great extent. The major purpose of such apps is just to make financial services accessible to everybody out there with the help of a mere smartphone application.

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