The financial world is changing at a pace never seen before in history. These new instruments are being developed and made available to everyone who is ready to explore the space and meet a variety of needs. Investment in decentralized finance (or DeFi) has increased to $ 1.5 billion in blocked assets. These assets come in the form of digital tokens called cryptoassets and have many of the same properties as those found in more well-known financial markets.
All of this happens against the backdrop of traditional financial markets, which operate in a very strange state. Interest rates on savings accounts around the world are bleak or negative, and the bond market is regularly becoming negative. Inflation eats everything away.
What is Defi exactly?
By and large, DeFi products and services aim to achieve results similar to those seen today in the traditional financial world. Common examples are stable currencies, secured loans, bonds, interest rate swaps, etc. The main difference is that they don't rely on institutions to act as trusted third parties. All of the trust lies in the complex but transparent code and math that make up the blockchain and smart contracts that feed the ideas into the technology.
Can you give me an example of a DeFi market?
Imagine a money market where you can earn interest or borrow assets against collateral. In the traditional world, your security could be a home and a home loan could be your borrowed assets. For many people, brokering this loan would be a lengthy process of filling out forms and providing legal documents on property.
Not so in the DeFi world. Remember that everything is treated as a crypto-asset that by definition already has value and property. All that is required is to transfer some control over the cryptoasset into a smart contract to act as collateral for a loan. Based on the value of this deposit, new cryptoassets can be minted in the form of a cryptocurrency (just like a bank creates new money when you issue a loan).
An example would be to deposit ETH (Ethereum's primary cryptoasset) as collateral for DAI (pronounced "dye") – a cryptocurrency linked to the value of USD. This efficiently eliminates the volatility of previous cryptocurrencies, which would suffer from large fluctuations in value, making pricing difficult for traders. Accepting DAI fixes this issue while maintaining all the benefits of cryptocurrencies (finality, reduced fees, fraud reduction, etc.).
I need a quick reminder of blockchain and smart contracts.
Blockchain technology is based on digital tokens, formerly known as cryptoassets, that owners can change in an untrustworthy way. Ownership is tracked using a special distributed database so that everyone can agree on who owns what (with different levels of data protection).
The most advanced blockchains support smart contracts that can be used to program cryptoassets. So you don't need a large middle or back office to take breaks, delete them and manage them. Smart contracts should make the most complex financial product as easy as sending an email.
Ethereum is by far the largest blockchain-based smart contract ecosystem in the world and is currently being updated significantly alongside its core infrastructure to switch to Ethereum 2. Many of the largest DeFi markets use Ethereum as a platform.
It sounds like Ethereum is already winning DeFi, why the need for Ethereum 2?
At the time of writing, Ethereum 1 is secured with a proof of work mechanism that is time and energy intensive and therefore restrictive. You can think of this as a transition from the old days of dial-up modems to the modern era of fiber optics to the home and to all the new services that make it possible to upgrade (imagine Netflix dialing in instead of broadband!).
Ethereum 2 uses a more efficient security mechanism called Proof of Stake. This significantly increases transaction throughput and allows Ethereum 2, in combination with various other scaling solutions, to outperform transaction throughput from traditional financial networks.
To prove the use, the parties involved must provide funds as security and check the integrity of the transactions in the network. Dishonest auditors will confiscate their collateral, but honest auditors will be rewarded with interest payments at ETH. This is a convincing value proposition since the yield curve is between 18% and around 5% over a period of 3 years. This adds to the underlying value of Cryptoasset in the open markets.
Where can I learn more?
A good introduction to Ethereum can be found on the official Ethereum Foundation Website.
Always keep in mind that many of these tools are currently prototypes – there is no insurance for your losses – but you can make potential profits if you are willing to take the trouble to learn.
This article was written by Attestant.io. We have designed and developed a custody-free service for individuals and companies with> 32 ether.
You can find more information in our technical articles at Use of Ethereum 2.
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