Blockchain & Fintech (Part-1)

An ecosystem of financial applications which is built and able to run on blockchain networks is known as Decentralized Finance. The uniqueness of DeFi which?differentiate it from traditional finance is that it’s open-source, permissionless and transparent ecosystem. Decentralized finance is designed for the internet age. DeFi is an open financial system. This gives you control and visibility over your money. DeFi takes you to the global market as an alternative to local currency and banking options. You can access DeFi products/services if you are connected to the Internet. DeFi applications process billions of dollars' worth of cryptocurrency transactions each year. Only the number of transactions will increase.

The market is always open. There is no centralized authority, so there is no blocking of payments or denial of access to services. The service is automated, more secure, tolerant of human error, and the code used can be verified and scrutinized. For example, pay your employees in real time. People take out loans and repay loans without personal information.

Will DeFi overcome Traditional Finance?

There are three reasons why DeFi has the potential to outperform the conventional financial system and gain increasing attention in scientific, economic, and public debates:

1- Growth of DeFi: DeFi is a highly scalable and global ecosystem. Once DeFi as a whole (or a specific DeFi application) proves its utility, exponential growth is possible. DeFi Pulse monitors the total value locked (TVL) on smart contracts on all relevant DeFi applications.

2- Space in Market: The capitalization of all DeFi applications was just 5% of the total crypto market as of July 2020. In addition to that, we can argue that there is much room for growth only by further asset redistributions within just the crypto space.

3- New market created: 7 billion adults do not use a bank, according to the World Bank. DeFi is not privileged, so anyone can access these financial services from anywhere. In principle, all you need is electricity, internet and a smartphone. DeFi can be a viable option in areas where banks are too expensive compared to their income.

What are the Risks associated with DeFi?

1.?Counterparty Risk: If you take part in crypto loans or any other kind of lending,?you’re at risk of the counterparty not repaying their debt.

2. Regulatory Risk: The legality of certain services and projects can be difficult to ascertain. If you are invested in a smart contract that is subsequently shut down due to regulatory problems, then your funds can be at risk.

3. Token Risk: The assets you hold have different risk levels affected by their liquidity, trustworthiness, token smart contract security, and associated project and team. As the DeFi pace has many low market-cap tokens, token risk can be particularly high.

4. Software Risk: Code vulnerabilities can undermine the security of smart?contracts you’re invested in. Your wallet could also be compromised due to connecting to DeFi DApps and giving them certain permissions.

5. Impermanent Loss:?If you’re staking in liquidity pools, divergences away from the price ratio you entered at will cause you to lose some tokens deposited in the pool if you withdraw.

Trends and types of tokens in DeFi:?Social and Fan token:

Social and fan tokens are slightly different, but mostly fall into the same category as NFTs. Social tokens are creator tokens issued by artists or creators to monetize themselves or their work. As an approach to financialization, social tokens create a direct, mutually beneficial relationship between creators and fans and eliminate intermediaries. Brands or clubs issue fan tokens to increase community engagement. These tokens will give fans access to fan-related membership perks such as voting on club decisions, product designs and exclusive experiences.

DeFi governance tokens:

Governance tokens are a growing trend of crypto assets issued by protocols to give token holders a voice in protocol development initiatives. These tokens can be used by users to perform other actions, such as using them as collateral. Governance Tokens started with the introduction of MakerDAO Maker Tokens (MKR). Today, major DeFi protocols such as Curve Finance, Uniswap, Compound, Aave, Yearn Finance, MakerDAO and others have individually accumulated between $4 and $18 billion in TVL through governance tokens.

Stablecoins:

More decentralized and supported stablecoins such as DAI can be linked with cryptocurrency collateral to issue these stablecoins to provide high-quality collateral. With the advent of a new trend in stablecoins called algorithmic non- collateralized stablecoins, we see ways to provide users with improved price stability compared to secured stablecoins. For example, TerraUSD (UST) uses a dual-token system to maintain fiat pegs, while LUNA tokens serve as governance and fee tokens.

DeFi Derivatives markets:

Derivatives are financial contracts that obtain their value from collection of other assets. Derivatives markets are prevalent in traditional finance because they allow people to invest in assets that are pegged with stocks, commodities etc. But, in DeFi allows anyone to create and manage derivatives transparently on blockchain using smart contracts. Whereas, in conventional system a central body creates derivatives.