Introduction
DeFi is the new kid on the block when it comes to Finance. It is almost impossible to think about anything in Finance and not find an alternative in DeFi. Think about loans, investments, trading, and any topic related to Finance — DeFi is becoming the new standard. This article is well-detailed and descriptive. It will help you get started in learning the basics of DeFi and grant you enough information that makes you an advanced DeFi person and, lastly, become a DeFi evangelist.
To get you started, CeFi refers to Centralized Finance while DeFi refers to Decentralized Finance.
Fun Fact: The total value of crypto assets looked on DeFi protocols has increased by 500% from November 2020 to November 2021
What is DeFi?
DeFi stands for Decentralized Finance. It is the new kid on the block when talking about anything that relates to Finance. DeFi launched in 2017, but it didn’t get popular until 2020, gaining landslide acceptance. Since then, the financial ecosystem has evolved, with loads of apps and activities developed daily.
Generally, DeFi is often described as the movement that promotes decentralized networks and open-source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.
At Surehive, we maintain that DeFi is a suite of products that facilitate permissionless deployment and replication of traditional financial instruments through well-orchestrated Smart Contracts running on public blockchain networks.
https://defillama.com/ reports that the value of assets attached to DeFi contracts (known as Total Value Locked or TVL) made a shocking increase from roughly $697 million at the beginning of 2020 to more than $85 billion in August 2021.
Pro tip: DeFi is way more than Decentralized Exchange. You can take loans. You can borrow against your BTC, Ethereum, Cardano, and more so that you too can buy that dream house or car and anything without getting any guarantor or surety.
Importance of DeFi
A distinct feature of DeFi is its use of applications. Some of these applications were previously considered unachievable. An example is Loans. You get loans that repay automatically, and some protocols reward you for borrowing. DeFi continues to unveil itself, and no one can predict the subsequent successes that await it in the next six months to one year.
Presently DeFi has:
- Higher interest rates — DeFi offers attractive rates when compared to any other financial system ever introduced. The average interest rate for any savings account globally is less than 5%, but DeFi allows you to get 10%, 100%, or even up to 200%.
- There is no barrier to entry — DeFi is open to anyone. No KYC. No Censorship. DeFi removes every form of barrier available in how money is made, saved, spent, and sent.
- End to the financial crisis — the last seven financial crises that affected the masses in the previous 100 years were all caused by large financial institutions. These big institutions got bailouts after the crises, but the masses got nothing. With DeFi, there is a collective responsibility and collective consequences — the good and the bad, and the ugly, everyone bears it. DeFi is a leveling ground for everyone.
- No Off Switch — Anyone that trades forex is aware of the off switch. The BUY can easily be deactivated. With DeFi, trading is powered by liquidity. No person or institution can switch off or on trading. Trading is always available as far as there is liquidity.
Smart Contract
Smart Contracts are the most talked about concept/topic in the blockchain and cryptocurrency communities. A “smart contract” is a program that runs on a contract-enabled blockchain. It’s a collection of code (its functions) and data (its state) that resides at a specific address on the Blockchain.
Pro tip: Smart Contracts run on different blockchains. Some Smart Contracts enabled Blockchain to include Ethereum, Solana, Cardano, Ergo, and Polkadot
NFTs
NFTs are a significant part of the DeFi ecosystem. They are of particular interest to artists and creatives. The growth of NFTs is the most amazing in the DeFi Ecosystem.
The reason is simple — As of December of 2020, the total market value of NFTs was sitting at $52 million (42,720 ETH), with 53,663 unique works of art sold on the five largest platforms. Today, the total market value of NFTs sits at $490 million (244,953.521 ETH), with 151,977 artworks sold.
One reason for this huge rise in the interest and value of NFTs is the Coronavirus pandemic. During the pandemic, many money-generating activities of artists were already on a decline.
A survey- highlighted that 62% of artists were currently unemployed, with 348,000 jobs no longer supported. The pandemic paved a fertile land for artists to showcase their artwork to a larger audience since most were available online.
So what are NFTs?
NFTs stand for Non-Fungible Tokens. They refer to artworks that only exist in digital form — pictures, drawings, music, images, and pretty much any form of creativity that can be made available in digital format (Music, video, and artworks). Articles and social media posts are not left out as the First ever Tweet by Jack Dorsey on Twitter — “Just setting up my Twitter” was sold for $2.9 Million.
What makes NFTs special?
Non-Fungible means an asset that cannot be divided. They are unique and can’t be replaced with anything else. NFTs are designed to give you something that no one can copy. — ownership of the work. To put it into perspective, anyone can copy the Mona Lisa picture, but only one person can own the original art created by Leonardo da Vinci.
Buying an NFT means you are taking ownership of the authenticity certificate and automatically becoming the new originator. To make it simpler. When a musician releases a song and decides to sell it, the interested party will enter a Smart Contract with the musician. When all the terms are met, the new party becomes the new owner of the song, and every right and entitlement that should go to the musician comes to you.
NFTs hinge on exclusivity. It is about having proof that you are the owner of the real version of a digital asset. The most notable and most expensive NFT ever sold (also the most expensive artwork ever sold) is the Everyday’s: The First 5000 Days, and sold for $69.3 Million.
Decentralized Finance Versus Centralized Finance
The traditional system is referred to as Centralized Finance. The process of Centralized Finance involves much paperwork. New regulations are constantly emerging, and while the old regulations are still being managed, the Governments or intermediaries come up with new rules without asking.
DeFi, on the other hand, offers a higher level of autonomy with transactions; no permissions are needed to conduct transactions, and deals are signed without delays. Transactions fees are transparent, so you know when, why, and what you are paying.
Getting loans is one reason many prefer DeFi to CeFi. For CeFi, you go through piles of paperwork, fill out forms, notify your guarantor, wait for the bank manager, account manager, and bank processing time, whereas with DeFi, it is different. Here is how it works
Pro tip: Be careful of the information you share with others. You see that beautiful lady acting extra nice to you. Well, it’s a guy waiting to empty your wallet. So be careful. Never share your personal/wallet details with anyone.
DeFi Loans
Through DeFi loans, one can quickly and easily take out a loan without disclosing their identity to a third party or going through the checks that exist in CeFi. CeFi has restrictions on almost everything. From the amount that can be taken as a loan to who is taking it and the pressure when it is time to pay back the loan.
With DeFi, you are anonymous. It does not require any paper or any physical asset like a car or house. It only requires you to offer something as valuable as the loan you want. It could be a variety of currencies.
To put it into perspective. Let’s say Surehive has a token named IVE, and you need 1 Bitcoin. You can set your IVE as collateral, and once you pay back your loan of 1 Bitcoin, you receive your exact value of IVE back — it’s that simple.
Blockchain Platforms and why Cardano?
DeFi is still in its early days, yet many interesting projects are already trending, such as farming, staking, flash loans, synthetics, and many more. Some of these are still experimental, and even with the high gas fees and regular exploits, the Total Value Locked in DeFi is constantly growing at a vast rate.
For a long time, Ethereum was locked in the shadow of Bitcoin. It wasn’t until 2020 that DeFi gained popularity that Ethereum got a better stage since developer and user activities surpassed any other blockchain.
For Ethereum, congestion and high gas fees are plaguing the network and making Decentralized Exchanges almost impossible for the everyday user to afford. Simple transactions cost up to $20. While Ethereum is currently facing scalability issues and becoming very hard to use, Cardano comes to the rescue.
The beauty of the Cardano Blockchain is its ability to process 250+ transactions per second compared to Ethereum’s 15 transactions per second.
Aside from speed, the PoS model allows Cardano an average cost of 0.1 ADA, which is a couple of cents compared to Ethereum’s $20 per transaction for basic transactions and $200 for complicated transactions. Also, the network is more decentralized since everyone can become a node validator in Ouroboros. At the moment, there are more than 1500 validator pools in Cardano.
Cardano also consumes 99% less electricity when compared to Bitcoin and Ethereum. Lastly, passive income holders of Cardano can earn passive income by staking their ADA coins.
Surehive is changing the game by creating a non-custodial DeFi protocol and crypto-token marketplace implemented on the Cardano blockchain network that allows users to swap, borrow, lend, save and seamlessly perform yield farming. Surehive is built on the premise of flexibility to liquidity providers through Customizable Liquidity Allocation (CLA) and Constant Ellipse Automated Market Makers (CEAMMs) to improve capital efficiency and reduce slippage on the Cardano network.
Conclusion:
Don’t let your learning end here. You should stay tuned for Part 2 of this post where we highlight the different consensus algorithms as well as the difference between DPoS and Cardano’s Ouroboros.
