Steem Crypto Challenge Month #2 : Diving into DeFi
Hi all @project.hope members and even those beyond our community. I had no time about joining Steem Crypto Challenge #1, so let me dive into the second theme which is DeFi.
This challenge is sponsored by @steemitblog and it is an initiative announced in this article Steem Crypto Challenge Month #2 : Diving into DeFi. So let's dive straight into it!
Photo source: Pixabay (CC0 license)
Centralized Finance (CeFi)
In the beginning, I think it's necessary to talk a bit about centralized finances and why DeFi is here to replace it or at least supplement its services. Because I don't think that DeFi will just overtake CeFi right now within a few years. But it will certainly complement it and improve as well!
Imagine centralized finances as a traditional Bank <--> Customer relationship. The bank offers customers financial services such as borrowing, lending, different financial instruments, and in the very first place...letting you operate with your money. By using a central point, who stores all your personal data and the information about all your transactions - THE BANK. Don't get it as a pejorative word, without a bank, the transferring of money would be much difficult and lending & borrowing services much obscure.
Being a bank and offer CeFi as a service, this is the privilege that centralized finance has brought to the world, until recently. Not that it all started with Satoshi Nakamoto and his Bitcoin, well but that was just a first sparkle. From that time, you can own your finances. The process was then upgraded by smart contracts brought by Ethereum. The real DeFi jewel, which started all the craziness of today was MakerDAO with its lending service and offering its own stablecoin called DAI.
Decentralized Finance (DeFi)
DeFi is one of the most inflected words in today's crypto ecosystem. But does it mean? How can be finances decentralized?!
DeFi is a way of understanding finances, that are using for their services smart contracts and are defined by the code. Those smart contracts are automated, so there is no necessity to "click the button" by any person or centralized company, like a clerk in the bank in the centralized finances.
Lending and borrowing
If you want to borrow money, there is a chance to do it in a decentralized fashion. Mostly you need to have big crypto collateral to borrow crypto, but some new services started to offer undercollateralized loans with different settings! This is a new revolution in finances indeed.
Lending is the other nice product. If you have some BTC or ETH which you HODL, or in the moments of uncertainty even your stablecoins, you can put it "to work" into some DeFi protocol and earn passive income. Lend your USDC in Fulcrum for 21 %! Or put your Bitcoin into work at BlockFi for 6% p.a.! Amazing, isn't it?
Risks in DeFi
Are there any risks in DeFi? Yes, there are. The smart contracts are quite new technology and some blockchains have not long history track, which could test them. So there is always a slight chance, that they could be hacked or there could be some bug in the code. Just remember the "DAO hack" on MakerDAO a few years ago.
But the risk is also included in the price. That is why you can have significantly higher interest on your deposited capital than the banks usually offers.
Hybrid Finance (HyFi)
I am not thinking that DeFi will overtake CeFi right away. But there is a need for the opportunity to choose what one would like to use! And yes, in the future, even some centralized companies can benefit from DeFi and offer services related to DeFi. That would not be a pure DeFi, but some kind of hybrid finances. HyFi I would call it.
Some of the examples of HyFi can be found in some centralized exchanges. Just take the biggest one as an example, Binance itself. In the last few months they started various different products from staking different coins, savings - where you can easily deposit crypto and earn rewards from 1% to even 45% with new types of "farming savings" products! And we are not talking about some unknown exchange, but Binance, where "funds are SAFU", as CZ tends to say.
Binance.com flexible savings services
One ot the newest features or services of Binance is Binance Liquid Swap. You just deposit your stablecoins such as USDT, BUSD, DAI, or USDC and you are getting interest from providing liquidity to the Binance Liquid Swap service. At this moment, you get yearly interest between 16% to 21%, for your dollars! Not 1% like in the bank! With small risks involved of course, but is it worthy? This is the question you need to answer only yourself.
Binance.com and their Liquid Swap service rates
Am I excited in DeFi?
Yes, because I see, that DeFi is the real usecase of the crypto, here is really the usage visible. Just check how many millions are locked in the DeFi products! You can borrow crypto for your further investments (think of the risks before you do this), as well as you can lend your crypto or even stablecoins for interest in BlockFi or Aave, or provide liquidity to get even better interest in some HyFi services such as Binance.
Yes, you need to be very cautious, when you are handling your finances. While using DeFi, be sure to not-lose your mnemonic phrase or password. Even without your mistake, you can lose your funds if the smart contract has some bug or your chosen hybrid finance service is hacked. But with more experience (try it with low amounts at the beginning), you will be smarter and you will evaluate risks even better.
Start using DeFi RIGHT NOW. Start with a small amount, but do it right now. You know why? When it will go mainstream, you will already have some kind of experience and you will know how to avoid mistakes. Use DeFi in the way that suits you well! Do you have some HODL portfolios for the long-term? Why not get interest from your deposits? Lend it to some proven service and enjoy nice interest, or passive income if you want to think that way. But start using DeFi today!
Great explanation! Defi is the future I really see a lot of opportunities there.I wish you much success in your challenge, this kind of readings are very entertaining
Thank you, I hope my explanation is an understandable one.
I also missed the first week of this competition.
Defi is a nice place to get started anyway. I'm glad that you brought up Binance. When BNB was running, I thought it a near perfect example of the potential of future cryptocurrency applications.
In BNB, is what you have is a need for liquidity so that investors can have a certain assurance of a free-flowing market where they won't be trapped in either a hack or other rush to withdraw their funds. Yes the percentages in defi can be enticing. What seasoned investors might like most though is liquidity.
It is said that financial markets aren't ruined by bearish runs, but rather lack of liquidity. The lack of activity in the market signals an end to interest. It can mean the devaluation of an asset or an entire industry. While rare, it does happen. Just consider what the electric car could mean for the oil industry. Would there be as many interested investors wanting to participate in the trading of oil?
Binance coin instantly adds viability to every listed coin because of the possibility for instantly exchanging. How is this related to defy? In a sense, it is a very rapid application. Albeit, maybe not an ideal example, I merely wonder how fast future defy applications will look in comparison to the current financial system.
#onepercent #usa
Yes, I am also curious about how the future of finances will look like. For example in 10 years from now!
About BNB and Binance, I really like their products and the way they doing it, but there is one thing everyone should have on their minds all the time. It is not decentralized way, even the Binance Chain is not fully decentralized. I am not saying its a big trouble now, but just its good to know that "no keys, no crypto".
Absolutely
Right on target
Perfect
Without peer to peer networks, AKA decentralization, AKA handshakes, we don't have blockchain. Andreas did say that those that employ partial blockchains sometimes gain advantages over legacy systems. However, he quickly reminds us that their fundamental aspects that make a blockchain what it is. and without each of them, we're missing out.
Good article, I think it's time to allocate some coins in a savings plan 16% sounds great to me.
Yes it is, but I would say, when crypto will turn into bullish phase, 16% is "not enought". But for the "sideways" or "bear market" time, why not to get profits from stablecoins, right?!