DeFi for Dummies.
A Beginner’s guide to decentralized Finance.
Defi: The Answer to Traditional Finance problems.
The traditional financial system has long been criticized for its lack of accessibility and transparency. Many people are excluded from participating in the global economy due to high barriers to entry, such as strict credit checks and high fees, which can make it difficult for individuals and small businesses to access loans or other financial services. In addition, the centralized nature of traditional finance has led to a lack of trust and accountability. This is due to the fact that a small group of financial institutions, such as banks and other large corporations, hold a large amount of power and control over the financial system.
However, with the emergence of decentralized finance (DeFi), there is a new way to access financial services and opportunities without relying on traditional financial institutions. DeFi is a decentralized system that uses blockchain technology to provide financial services such as lending, borrowing, trading, and investing. The key difference between DeFi and traditional finance is that DeFi is built on a decentralized network of computers rather than being controlled by a central authority.
Answering The Question ‘’What is DeFi?’’
Decentralized finance, or DeFi for short, is a rapidly growing ecosystem that is built on blockchain technology. It aims to provide a more open, transparent, and accessible financial system for everyone. Unlike traditional finance, which is controlled by a small group of financial institutions, DeFi is based on decentralized networks that operate on a peer-to-peer (P2P) basis. This means that anyone can participate in the DeFi ecosystem, regardless of their location or financial status.
One of the key benefits of DeFi is that it allows users to have full control over their own assets. Instead of relying on centralized intermediaries, such as banks and financial institutions, users can access financial services directly through DeFi platforms. For example, users can lend and borrow money, trade cryptocurrencies, and earn interest on their assets, all without the need for a traditional financial institution.
Another benefit of DeFi is that it is built on open-source protocols, which means that anyone can access and use the underlying code. This promotes transparency and trust, as users can see exactly how the system works and how their assets are being used. DeFi platforms are also built on blockchain technology, providing an additional layer of security and immutability.
DeFi is still a relatively new concept and is still in its early stages of development, but it has already shown great potential. More and more people are starting to use DeFi platforms, and we are seeing a growing number of projects and initiatives that are leveraging the power of DeFi to create new and innovative financial services. The future of DeFi looks promising, and it has the potential to revolutionize the way we access and use financial services.
The History of Decentralized Finance
The history of DeFi can be traced back to the launch of the Ethereum blockchain in 2015. Ethereum introduced the concept of smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. This opened up the possibility of creating decentralized applications that could interact with the Ethereum blockchain.
In 2016, the first decentralized lending platform, EthLend, was launched on the Ethereum blockchain. This platform allowed users to lend and borrow Ethereum using smart contracts. It was followed by the launch of other decentralized lending platforms such as MakerDAO, Compound, and Aave.
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In 2017, the initial coin offering (ICO) craze brought attention to the potential of DeFi, as many projects raised millions of dollars through token sales. This also marked the beginning of the DeFi hype cycle, as more and more projects were launched in the space.
In 2018, the launch of the Uniswap decentralized exchange (DEX) marked a new phase in the development of DeFi. Uniswap introduced the concept of automated market making (AMM), which allows for the instant exchange of tokens without the need for an order book. This paved the way for the development of other DEXs, such as Sushiswap and Balancer.
In 2019, the DeFi ecosystem continued to evolve with the launch of new platforms such as Chainlink and Kyber Network, which provided decentralized oracles and liquidity to the ecosystem. Additionally, the launch of yield farming protocols, such as Yearn Finance and Compound Finance, brought a new level of complexity to DeFi and attracted a new wave of investors.
As of 2021, the DeFi ecosystem continues to grow and evolve, with more projects launching and more users entering the space. At the time of writing, the TVL of the ecosystem is $47.44 Billion, with Ethereum leading with a dominance of 59.6%, according to Defillema.
Understanding the term Total locked value(TVL) in DeFi
Total Value Locked (TVL) is a metric that is used to measure the overall health of a decentralized finance (DeFi) protocol. It represents the total number of assets that are currently being staked or locked in a specific protocol. It is important to note that TVL is not meant to represent the number of outstanding loans, but rather the total amount of underlying supply that is being secured by a specific application.
To calculate TVL, the supply, the maximum supply, and the current price of an asset are taken into consideration. The current market cap is obtained by multiplying the circulating supply by the current price. The TVL ratio is then calculated by dividing the market cap by the TVL of the service.
The Role of DeFi in Decentralized Identification.
DeFi (Decentralized Finance) plays a crucial role in decentralized identification by providing a framework for creating and managing digital identities that are not controlled by a central authority. This allows for greater security and privacy of personal information, as well as increased accessibility to financial services.
It facilitates the development of decentralized identification through the use of blockchain technology and smart contracts. These tools create digital identities that are secure, tamper-proof, and self-sovereign. They also enable the creation, management, and verification of digital identities without the need for a central authority.
In recent years, there has been a growing focus on the interaction between social networks, reputation, and decentralized identities, with several tools and projects emerging in this field, such as soulbound tokens, ENS, POAPs, and Lens. This trend is expected to continue and gain more traction in 2023.
The increased adoption of digital wallets and non-fungible tokens (NFTs) will also contribute to the growth of DeFi in decentralized identification. Digital wallets have gained greater awareness among the public in the past year, with large social media companies such as Reddit, Instagram, and Twitter introducing them. As of November 2022, around 80 million crypto wallets have been created, with 6% of them interacting with DeFi. This trend of increasing wallet adoption will likely contribute to DeFi’s growth in the coming years.
On the other hand, NFTs can be used as unique identifiers in DeFi, helping to establish decentralized identities. For example, users could use an asset’s NFT as liquidity in a decentralized exchange’s liquidity pool. They could also borrow cryptocurrency against that NFT to invest in other yield-bearing products.
