What is decentralised finance?

Good morning lions hope you've all been well and enjoying your mid week rush.

Yesterday I did a brief write up of what the basics of a block chain is and how it works. Continuing on I'd like to share with you the basics of Decentralised finance. A relatively new concept that has emerged most predominantly on the Ethereum network it is starting to make its way across to bimance network and other block chains.

Ethereums high fees are starting to negate the interest earned from Decentralised finance leaving many in search for cheaper options. But more on that a little later.

What is Decentralised Finance?

Decentralised Finance most commonly referred to in its abbreviated term simply as DeFi is a block chain financial service.

But isn't Bitcoin? it's true that in 2009 when Bitcoin came about it was intended to replace traditional financial systems. Instead of having currency issued by central banks Bitcoin is a Decentralised form of currency. Although not accepted as legal tender just yet, I'd anticipate in the future it will be.

The difference between bitcoin and defi though is alot deeper and complex. So if I get it wrong or miss things please don't hesitate to drop a comment in the section below.

Bitcoin relies on a growing network, the more transactions the more hash power is needed to perform its operations. In it's attempt to replace traditional banking and middlemen it has created an entire industry of middlemen which conduct the transfers and validation of transfers and payments. As the coins value increases so too does its transaction fees.

An entire central authority has emerged for Bitcoin consisting of nodes, miners and of course the user base. This is why you may have heard Bitcoins terminology change from online currency to store of wealth similar to gold.

Defi, Smart Contracts and investors

In 2015 a new player emerged noting that there were many before but the main player to pull it off was MakerDAO which brought in the ability to loan and borrow cryptocurrancy. Traditionally all you could do with much of the cryptocurrancy you bought was, well hold it.

Similarly to traditional banking where you can borrow and lend fiat based on assets MakerDAO allowed people to lend their cryptocurrancy out to others for a fee. They also allowed you to borrow cryptocurrancy based on the collateral you deposited. If you borrowed you could then speculate on the market, it is is risky game as the volatility of the market often leads to mass liquidations causing millions and even billions to be lost in liquidity sell off's. If the value of the currency you borrowed drops significantly then contract that your cryptocurrancy is in gets sold to cover your debt.

Instead of middle men signing contracts and going through identity checks defi is different. As it is all listed on the block chain the same principles of privacy apply where all you need to supply is your wallet address and your deposit.

For loaning your crypto you get paid in fees from the person or persons whom borrowed the cryptocurrancy. Unlike individual loans it tends to be more pooled loans. So say you have Hive and there is a pool you can put Hive into. You put it in and get dividends paid to your wallet. You never know or meet the other people.

Further Advances

Further advances have emerged since Decentralised finance came about and that is Decentralised exchanges. Similar to a normal exchange except you don't pay with fiat. You put one token in and you get the other token out. A straight swap minus a small fee which is paid to people who provide liquidity (loans) to the Decentralised exchange.

Rather then a traditional exchange that makes all the money from fees and trades Decentralised exchanges pay it to their loaners which are referred to as liquidity providers.

When working in full operation it is a great way to continue to earn and build your wealth. Instead of having to sell your cryptocurrancy you're able to capitalise on its growth by providing a loan and then purchasing another cryptocurrancy never having to liquidate your position.

Most Decentralised finance services have lock in periods but more are emerging that don't require minimum lock in periods. I'd anticipate that this is due to the growing industry. So long as new people continue to entre the pool keeps growing.

Yield Farming

Ah yes CUB Defi my favourite! Yield farming is a new advancement that builds on all the above. You provide liquidity and you get paid in a form of reward, quite often the native token of the service your invested in. This is pretty much Cubdefi. It has some fees on a few of the dens and liquidity pools and as people deposit, withdraw, trade those fees are distributed to investors whom have provided liquidity to the pools.

Yield farming is definitely the popular option amongst investors and exchanges currently and it's a great way to retain user base and provide local economies.

Highly volatile at current but it is emerging as a leader. A newer form which I am still sceptical on is Safemoons model. An enormous supply of tokens which charges a fee or tax per trade. No staking required, no transfers required you get paid divs from the tax applied to the token and paid directly into your wallet.

It's a safer option for investors but for the actual project I'm not sure of the outcome. One things for sure is that it will definitely keep a lot more people HODL rather than selling because you can literally see your gains move every so often due to trading volume.

I hope you enjoyed this post and if I've missed anything, please let me know in the comments section below.

Happy Hump day!

Image source: Canva Pro Subscription

Posted Using LeoFinance ^Beta