DeFi: what is it?

DeFi, or decentralized finance, refers to a whole series ofapps able to make citizens independent of banks, insurance companies and other institutions and also, to a certain extent, of States.

At the origin of the applications of the Challenge is a characteristic of the Ethereum cryptocurrency: the smart contracts. These make it possible to associate a computer program with a given currency.

However, the key point of DeFi applications is that they are not tied to a given company; they rely solely on smart contracts. Once the application has been programmed, it works by itself. This therefore results in minimal costs for the user since there is no structure to maintain, offices to rent, intermediaries to remunerate… Moreover, the registration procedures are reduced to the strict minimum. As a result, DeFi-based insurance will be very inexpensive and flexible in the real world.

For an application of the Challenge can take off, it is necessary that users are spontaneously interested in participating, in investing their ETH (Ethereum), BNB (the currency of Binance) or other cryptos. To this end, in a DeFi application, rules are enacted in the smart contract in order to reward those who participate in the application in question. In addition, those who invest in the cryptocurrency linked to a given application receive “governance tokens” which authorize them to vote on the evolutions of the application.

How MakerDAO gave birth to DeFi

L’universe of DeFI was born on December 18, 2017 with an application called MakerDAO. It proposed a stablecoin, the DAI, a cryptocurrency whose value is always equal to the dollar (1 DAI = $1, whatever the circumstances).

A few years earlier, in 2014, the company Tether caused a sensation by offering the very first stablecoin: USDT. What was the logic? To be able to offer a stable currency in the fast-moving world of cryptocurrency. There where Bitcoin, Ethereum and other Cardanos have been able to ride a roller coaster, USDT has a quotation that is always equal to one dollar.

To guarantee this USDT – dollar parity, Tether claimed to have set aside 1.8 billion dollars (we call such a guarantee, the “ collateral “). Following various legal actions, it turned out that this claim had not always been true. However, USDT has won the trust of investors and is usually in the Top 5 cryptocurrencies worldwide.

The DAI, for its part, is not linked to any company; MakerDAO does not exist physical, it is indeed a decentralized organization. Its parity with the dollar is guaranteed by ETHs invested by the participants in the application.

The emergence of DeFi apps

The success of MakerDAO has given rise to a large number of applications related to finance and similarly based on smart contracts. Each revolutionizes the activity concerned in its own way.

• Thus, Aave offers to obtain a dollar loan (via USDT or DAI) in record time, the condition being to be able to “stake” (immobilize) a certain amount in ETH during the duration of this loan. In countries like Argentina where access to bank loans in dollars is not easy, this is a potential solution.
• Compound, for its part, offers remunerated savings with sometimes very high interest rates.
• On a DEX or decentralized marketplace such as Uniswap, you can trade cryptocurrencies between them with much lower fees than on centralized equivalents such as Coinbase or Kraken.
• And the yield optimizers such as those found on Farm.army offer potentially super juicy pre-programmed investments, everything happens as if you had an intelligent trader at your service.

By its flexibility, DeFi opens the way to applications that do not exist in the real world. For example, taking out insurance for a single plane flight, buying a share of a property with a tenant and receiving rent in proportion to what you have invested. Or, invest in a fraction of an Apple share or You’re here.

In the long term, DeFi could render obsolete a lot of activities requiring to go through intermediaries, to pay commissions to brokers (brokers) or other rights managers.