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All about DeFi: use cases, advantages, disadvantages and a look at Bitcoin DeFi

All about DeFi

What to expect in this article?

Learn about:

  • What is DeFi?
  • What are the current areas where DeFi is working?
  • Examples of companies that are working in each of the DeFi areas
  • What are the advantages and disadvantages of DeFi?
  • Recent issues in the DeFi space
  • What is a Bitcoin DeFi?
  • What are the advantages and disadvantages of Bitcoin DeFi?
  • Some companies in the DeFi space

The hype around Decentralized Finance (DeFi) has been at full swing in the crypto media recently.  What exactly is a DeFi? Let’s start at the beginning.

What is DeFi?

What is DeFiFinancial services broadly include banking, lending and stock markets. These markets are controlled by some of the world’s biggest institutions. The same institutions that were at the center of the 2008 market crash. That crash gave birth to Bitcoin blockchain (or should we say blockchain and bitcoin).

Now, blockchain is aiming to disrupt that very financial structure with Decentralized Finance, DeFi.

Decentralized Finance facilitates the same financial services without a centralized institute.  Decentralized finance gives the individual ability to be their own bank. The contracts that used to take place in a bank can now take place in an app on your smartphone without ever leaving the comfort of your home.  

Decentralized Finance is financial services on blockchain with minimal or no human intervention where the individual’s race, color, income level, credit scores do not impede them from getting the services on par with everyone else. Everyone is held to the same standards.

You can right now create your own wallet in seconds and start accepting payments from your customers. You can right now send money to whoever you want to anywhere in the world without having to stand in a virtual queue for weeks.  You can avail a collateral based loan without making rounds to a bank or institution and without getting screwed with fees and hidden APR rates.

Decentralized Finance at this time covers four aspects:  Stablecoins | Crypto Lending services | Decentralized Exchanges | Tokenizing assets

Stablecoins

cryptocurrencies that are pegged to fiat currency, generally to the US Dollar, to provide much needed stability to the crypto market.  Thanks to the stablecoins, many other services can now be brought to the mainstream as the volatility aspect is addressed through stablecoins.  Volatility continues to be a big problem in the crypto space and stablecoins are bringing the much needed stability and make the cryptocurrencies useful for mass adoption.

Examples

  • USDC:  US Dollar Coin is introduced by Circle and Coinbase.  
  • USDT: US Dollar Tether is probably one of the earliest stablecoins and one that is constantly enveloped in controversy regarding having enough reserves to support the minting of new coins.

Crypto Lending services

As of 2019, Crypto Lending has crossed $4.25 Billion in loans.  At this time, much of these loans are based on collateral, that is, you can use your crypto holdings as collateral to get a loan for a great rate compared to the market.  These loans are usually simple and do not include shark behavior that we see in the traditional lending models. As the space gains more traction, we might see loans provided based on individual’s credit score.

Examples

  • Celsius Network: Probably one of the greatest companies in the crypto lending space. They pay about 8% on some of the cryptocurrencies deposited on their app.  They pay about 4% on Bitcoin deposits. 
  • MCO:  Crypto.com offers crypto lending, debit card services and they even pay great interest on deposits.  At a time when the broader economy is going into negative interest rates – it is refreshing to see deposits yielding interest. 

Decentralized Exchanges

Most exchanges are run by an institution. This is true even for crypto exchanges. However, a new  class of exchanges are on the rise that do not rely on humans to transact. They are called Decentralized Exchanges or DEx for short. Usually a Decentralized Autonomous Organization (DAO) executes contracts based on the code.  Most DEx’s do not need users to verify their identity which has put these exchanges under scrutiny.

Examples

  • Binance DEx: Binance is #1 DEx in the market. “Binance DEX takes security to a whole new level. Peer-to-peer transfers and trades mean virtually zero exposure to security threats.”  DEx are usually lightning fast compared to more traditional exchanges.

Tokenization platforms

Blockchain provides a unique opportunity to convert any asset into token.  It could be a real estate property or a contract of future performance.  You can cash in on any type of asset on blockchain by tokenizing these assets/contracts.  This opens doors to massive liquidity for companies.  For instance, a company with 5 machines of $100,000 each can turn one of those machines into tokenized assets and raise capital without taking out a loan. The proceeds from that machine can then be distributed among the token holders that represent the ownership of that asset.

Examples

  • Dream Fans Shares: Spencer Dinwiddie turned his contract into 90 tokens to convert his sports contract into immediate liquid capital.  The holders of these tokens were promised yearly interest payments.  The holders of these tokens can then sell them if they are in need of cash.  

What are the advantages and disadvantages of DeFi?

Advantages

Access to all:  Barrier to entry will be eliminated for people to avail banking and financial services.  There are about 2 billion people who are denied banking services because of many barriers to entry – DeFi can eliminate them.

Global banking services: Be your own bank and start accepting payments or send payments through DeFi.  Most DeFi platforms do not have any restrictions on user participation.  Obviously, KYC verification is required by these platforms to comply with the Banking regulations.

Disadvantages

Not all DeFi services are created equal:  for every genuine DeFi service out there, there are multiple scammy imposters.  The onus of due diligence falls on the customer in this case. 

Collateral:  Most services now are based on a collateral system (except for creating your own wallet to accept payments, etc.,).  Unlike a bank that will lend you money if you have a good credit score and a decent income source, crypto lending relies on you being able to deposit a collateral to secure a loan.  Some might argue that if they had collateral – why would they need a loan?  There are few services that are sprouting that follow the traditional banking model where individual’s credit worthiness is taken into consideration.  

Ethereum is the most popular DeFi platform, so far

EthereumMost DeFi platforms in the market are built on Ethereum blockchain.  MakerDAO, probably one of the most popular DeFi projects, is built on Ethereum as well.

Many up and coming DeFi projects rely on Ethereum as well. Bidao, a new ICO, aims to build the first ever DeFi on Binance blockchain.

DeFi addressable market runs in trillions of dollars and if DeFi succeeds – it will take crypto to the next level of mass adoption.  

One of the issues right now with Ethereum based DeFi platforms is the lack of liquidity.  Many projects are looking to address this issue by bringing Bitcoin to DeFi. 

DeFi comes to Bitcoin

As discussed earlier, Ethereum is one of the most popular networks for DeFi services. Crypto experts are working on bringing the same DeFi services onto Bitcoin blockchain.  The solutions are being created to execute smart contracts on Bitcoin blockchain to make DeFi work.

What is Bitcoin DeFi?

The new hype in the DeFi space is Bitcoin DeFi. That is, executing the smart contracts related to operating Decentralized Finance Apps on the Bitcoin network.

Ethereum is made popular for its ERC20 token that can embed smart contracts.  Bitcoin has historically lacked the smart contract feature, although many solutions have been building layers on top of the Bitcoin network.  

Now, DeFi that was mostly limited to Ethereum (with MakerDAO leading the dominance) is coming to Bitcoin.

Projects that are bringing DeFi to Bitcoin

These are some of the projects in works that are bringing DeFi to Bitcoin network.

tBTC

tbtcSimilar to WBTC, tBTC is backed by 1:1 BTC.  “tBTC, a project developed by Summa, Cross-Chain Group, and Keep Network, lets BTC holders safely convert their BTC into the ERC-20 TBTC token and vice-versa at any time at a rate of 1:1, with no signoff needed from an intermediary,” the tBTC site explains.  At the time of this writing, Ethereum’s biggest DeFi players, that is, MakerDAO, Compound and UniSwap have all joined forces with tBTC.  

WBTC

WbtcWrapped BTC (WBTC) “delivers the power of bitcoin with the flexibility of an ERC20 Token.”

Bringing BTC to Ethereum will make it possible to leverage the humongous volume that Bitcoin enjoys onto Ethereum applications like DEx’s and DeFi applications.  The arrival of BTC volume will help the DApps built on the Ethereum network to thrive.

Liquality

liqualityLiquality makes it easier to trade cross-chain between bitcoin and ethereum based tokens. They describe their project as “Our atomic swaps enable direct and risk-free trade with partners, eliminating the need for costly exchange services that are preferred targets for hackers.”

Atomic Loans

Atomic LoansAs stated earlier, Crypto Lending is one of the facets of DeFi.  Atomic Loans is looking to bring the crypto lending directly onto Bitcoin through Atomic Loans.  The Mainnet is already live.  You can use your Bitcoin as collateral to get a loan in Stablecoins.  This way, you meet your liquidity needs without selling your Bitcoins.  You will be in control of your private keys at all times. There is no need to verify your identity, only ownership of your Bitcoin.

What are the advantages of Bitcoin DeFi?

Bitcoin DefiBitcoin is the unquestionable king of crypto.  It has one of the strongest networks for any crypto.  Any DApp that runs on Bitcoin gets the security strength of the entire network.

Strong network:  Bitcoin blockchain is arguably the most secure PUBLIC network on the planet.  The FBI and CIA may have stronger computers in their basements but they are not available for the public to build secure solutions on.  Bitcoin blockchain is one of the world’s strongest networks that anyone can access to build products on top of.

Liquidity:  Bitcoin enjoys the largest trading volume of any trading pair and bringing DeFi to Bitcoin will help bring liquidity to DeFi DApps.  

Brand visibility:  By now almost everyone in the world with a smartphone has heard about bitcoin.  They may even have a nickname for it…internet money, people’s gold, and others.  We cannot say that about Ethereum.  Brand visibility helps bring masses to a familiar service on Blockchain. DeFi is a great place to do that and bringing DeFi to bitcoin is a sensible way to do it.

Conclusion: More than just the hype

DeFi is definitely one of the most exciting things to come to crypto.  It has the hype factor of the ICO, but unlike ICOs, the utility around DeFi is not going to be a short-lived one.  

As the inflation in the traditional markets takes its toll people will be looking for alternative investments.  However, like Gold, they don’t want to invest in an asset that does nothing.  With DeFi, you can start earning interest or use it to raise capital without disposing of your digital assets.  

More importantly, DeFi is going to change the core structure of the financial system and may one day put the power back in the hands of customers so that their financial destiny doesn’t rot at the mercy of institutions.

Thank you for reading and sharing this article. Stay safe and healthy!

IMPORTANT DISCLAIMER

Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.

We do not endorse or guarantee the accuracy of the information and claims made.

All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.

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