Decentralized exchange: Explained!

What is decentralized finance?

Their industry at present is booming with cryptocurrencies. To date back to the origin of cryptocurrencies, there are multiple events responsible for the advancement of this phenomenal invention. Bitcoin, the first cryptocurrency, observed spectacular growth in its initial years, suffering in recent times due to a lack of stability and adaptability. One can’t trust Bitcoin for planning any asset because of the price volatility. The recent trend that has appeared to bring changes in the traditional finance world is Decentralized finance or DeFi. The programming is based on blockchain technology and uses smart contracts most commonly Ethereum avoiding financial intermediaries like banks or brokerages. Services that lacked speed previously and were erroneous, are much safer and easier to handle. DeFi allows one to lend and borrow and even earn interest.

How DeFi beats the conventional?

• DeFi allows one to have control over one’s own money instead of relying on companies through Web3 wallets like Metamask, Gnosis Safe and Argent.
• Transfer of funds takes less time through DeFi.
• There are generally no terms and conditions while operating DeFi unlike traditional finance accounts.
• There is no market timing making it flexible for everyone to use.
• Transparency is another big feature of DeFi.
• No risk of facing critical situations like the financial crisis.

DeFi lending and borrowing

Defi doesn’t need a central head in operating its financial services. The operations here fulfill the gaps visible in our conventional banking system. Investors and lenders can apply for a loan or deposit through a distributed system. The working tools behind this are mainly DApps and smart contracts. Smart contracts receive assets and make them available for borrowing without involving any third party. The top lenders at present are Maker, Aave and Compound.

In conventional systems while taking loans from Banks, collateral is required and it involves physical property but here in this case the collateral doesn’t include physical property, instead the borrower needs to offer something more valuable than the loan amount or at least equivalent to the loan amount. The collaterals can be any crypto coin and at present, there are many Defi Development Companies that make the process hassle-free. The accounts via DeFi help in increasing profits than the conventional saving accounts. Argent, Dharma, PoolTogether are some of the popular saving DApps. 

Overview of some top DeFi lending and borrowing platforms

Maker: This platform only allows borrowing of DAI tokens. Maker is open to all and collateral like ETH or BAT can be used to generate DAI. Another token for Maker is MKR which is the last resort and gets utilized when there is a fall in the collateral value. Maker’s Oasis Portal is mainly used for reviewing and depositing DAI.

Aave: Recently launched in 2020, it is also an open-source protocol. It uses Atokens against the deposited cryptocurrencies. Demand and supply act as the fuel for the interest amount. More the number of Atokens, the better the rate of interest.

Compound: First launched in 2018, this protocol uses web 3.0 wallets like Metamask to earn interest. Anyone having a crypto wallet is free to access Compound. Apart from the regular Ctokens, it recently launched ‘COMP’- to give voting rights to token holders. The voting rights give liberty to decide over new assets, technical upgradation and also collateralization factors. The said protocol supports multiple other assets apart from DAI like ETH, REP, BAT, USDC, USDT and ZRX.

The decentralized Finance platform has also been utilizing a prediction market called Augur to form predictive data since 2015. Augur operates through two functions mainly which are through market creation and secondly by trading shares. It uses the token called $REP, derived from reputation, quite symbolic to staking one’s reputation while trading. Apart from the predictive side, DeFi controls asset management through the synthetic protocol named Ampleforth. It uses the token $AMPL and like $REP it is based on Ethereum as well.

Well, it’s too early to predict the fate of DeFi but this space is certainly giving good competition to the conventional market system despite few obstacles on its way. By trying to decentralize the entire market system, it has undoubtedly given a new shape to the stagnant and conventional norms of workings.