There is a quiet revolution going on and it is shaping the way we will work, invest, save and borrow. DEFI is the decentralization of finance and of things and it offers us the ability to trade and monetize our assets more freely than ever before.
In this post, we will look at some of the main application of DEFI.
What is DEFI?
DEcentralized FInance or just DEFI for short may prove to be one of the greatest spinoffs from blockchain technology to date.
Broadly speaking, a DEFI service is one that has no central authority or very limited central authority. Just as Bitcoin is peer to peer cash, a DEFI system is a peer to peer service that works without the need for intermediaries. That service might be anything from a futures exchange to room bookings.
DEFI may be one of the biggest disruptors of the financial sector in the coming years. In fact, many experts are already saying that DEFI will do to finance what the internet did to the print media industry. DEFI will have far wider implication than just affecting the financial services that we know today. DEFI is blurring the lines between financial services and physical services as well.
Imagine being able to trade a financial market without ever having to deposit money with a third party or having to trust a brokerage house with your sensitive personal data. This is a decentralized exchange and they are popping up everywhere.
DDEX is one such exchange. It handles real time order handling and settlement of crypto currency trading through a decentralized model.
A decentralized exchange only requires you to connect your crypto wallet to their trading app. There is no forms filling, no sending money to a dubious third party, no uploading selfies holding your passport, and no nasty surprises when you try to withdraw your money.
A decentralized exchange replaces two services. It replaces both the broker and the exchange itself.
This means on a decentralized exchange, you are your own custodian. The cash or other assets remain in your wallet until you trade them with another party. Any trade you do ultimately settles on the blockchain in an open and transparent way. That is you do not need to trust a third party with your money, or your data.
In every other way, DDEX and similar platforms work like conventional stock and futures exchanges. They have order books to show market depth just like a regular exchange. There is full transparency in that you can see the entire order history.
So how can these platforms work without any kind of central control? Simply speaking, decentralized exchanges codify the rules of the exchange into smart contracts. These run on decentralized open blockchain platforms like Ethereum. The rules are enforced and validated in much the same way that bitcoin and other crypto currency transactions are. In addition, the rules are open to scrutiny by anyone that has the time and technical knowhow.
The number of instruments listed on DEFI exchanges is still rather limited at present. We can expect this to improve in the future as these systems evolve.
Decentralized lending and borrowing
As well as trading through exchanges, DEFI is biting chunks out of the lending and borrowing industry as well. Unlike peer to peer lending DEFI lending is decentralized and without middle men.
This means you can earn interest on your assets by pledging them into a lending pool. The implications of this are enormous.
AAVE for example lets you earn interest on holdings in your crypto wallet. You can connect a browser wallet or exchange wallets like Coinbase.
Some exchanges let you borrow to trade on margin. You can pledge crypto assets in your wallet as collateral and that allows you to borrow, sometimes as much as 5x the amount pledged.
For example, DDEX lets you borrow funds not just for trading, but for use outside of their platform. However, if you want to do that, you have to deposit more collateral than you borrow.
Decentralized prediction markets: Betting
Online betting is a huge industry. However, at the technical level, wagering bets is not very different from trading assets on a financial exchange.
In decentralized prediction markets, you bet on future events. They are non-custodial so you do not have to create an account or deposit money with an intermediary. Anyone, anywhere can access the platform. You just need a wallet.
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Sight.pm for example lets you predict the outcome of events like elections. Likewise, Augur is a decentralized betting exchange that runs on the Ethereum blockchain.
To date these have been proof of concept, but now the technology exists we can expect it to evolve rapidly.
Decentralizing real services
DEFI looks set to affect many other services that we are using. Even those we do not think of as financial.
Slock.it is aiming to expand the Airbnb and Uber concept of sharing to just about any other physical asset. They do this through their USN or universal sharing network. This means you could monetize not just a room in your house or your car, but just about any asset that you own.
OpenBazaar is a decentralized market place for buying and selling. After downloading their app, you can start connecting peer to peer with other buyers and sellers. Like other DEFI apps, on OpenBazaar payment is with cryptocurrency. They have an escrow system and a dispute resolution service a bit like eBay. However, unlike eBay & Amazon, there is no central authority and no middle man taking a big slice of every transaction. The app is autonomous; users rely on the decentralized network and the wisdom of crowds to settle disputes and to operate fairly and legally.
For bloggers and other content creators, they can earn rewards on Steemit.com or through the Brave browser. Readers can reward content they like with tokens. This direct content creation and monetization bypasses third parties like advertising networks, search engines and social media giants.
Commoditization of virtual resources
Think of all of the spare capacity of mobile phones, laptops and computers that is not being used to its full potential. Most of us only use a fraction of our computer’s storage, bandwidth or compute power. Now DEFI apps are allowing anyone to monetize that potential, directly without a service provider sitting in the middle and extracting value.
One of these apps is Storj.io. You can rent out your spare capacity with Storj and they will pay you their crypto tokens as reward. Storj leases out that spare capacity to developers and other users through a separate app called Tardigrade.io. Tardigrade deals with all of the technical hurdles like security, distributing storage across devices and ensuring uptime.
The Future of DEFI
Many of the apps mentioned here are still experimental. In spite of that, they have broken new ground and have shown just a glimpse of what distributed blockchain technology can offer us. We can expect these technologies to expand ever more into our lives in the not too distant future.