The Read
What is DeFi and Yield Farming?
Submitted by anonymous » Fri 10-Dec-2021, 04:30Subject Area: General | 1 member rating |
 |
One of the hottest areas in cryptocurrency today is decentralized finance (DeFi). Entrepreneurs in the crypto market will recreate traditional financial tools within a decentralized environment, outside of the control of any company or government.
The need for a more transparent and open financial system is the key driver behind DeFi. It is a blockchain-enabled concept that gives progressive and agile tools to users, reducing operational risk associated with a traditional finance model.
The DeFi sector boomed in 2020 with new coins such as UMA and COMP, allowing users to use traditional services such as lending and borrowing (giving rise to yield farming) in a decentralized ecosystem. Several reports point to the excessive growth in the DeFi economy over the last year, with the total locked value currently at $18.09B.
DeFi vs traditional finance
Decentralized and traditional finance have three core differences.
A public blockchain will act as the source of trust in a decentralized finance model. It governs all of the operations in the sector. In traditional finance, governments and banks act as the source of trust and govern the operations.
DeFi is open source and allows entry to anybody with programming skills to build applications on the public blockchain. Banks are not willing to expose their internal operations to the public.
DeFi promotes innovation by encouraging developers to build their own applications; whereras traditional models are usually covered with red tape and regulatory barriers.
Mutual trust is a big win for DeFi over traditional financing. For example, if you want to borrow from a bank, there is a legal requirement to conduct identity and credit checks to assess whether the borrower can repay the debt. In DeFi, everything is about mutual trust and preserving privacy. There is a possibility that if regulators continue to stifle innovation, there will ultimately be no place for intermediaries in the finance industry.
The DeFi application
The first deployment of DeFi was Bitcoin, which enabled people to complete a financial transaction without a financial intermediary. Bitcoin and a few other cryptocurrencies began the first wave.
However, the second wave of DeFi enabled by the Ethereum blockchain added another layer of programmability to the technology. Almost all DeFi applications are built on the Ethereum blockchain, a network that maintains a shared ledger of digital value. The participants within the network control the issuing of cryptocurrency (ether) in a decentralized manner.
Decentralized exchanges (Dexs) such as Uniswap are entirely peer-to-peer, without any company or other institution providing the platform. DeFi services in 2021 include:
Lending and borrowing cryptocurrencies for yield farming strategies that earn interest on platforms like Compound
Using Augur to bet on the outcome of events
Creating and exchanging derivatives of currencies, precious metals, and other real-world assets using Synthetix.
No loss lotteries like PoolTogether
Buying cryptocurrency such as DAI and USDC that are both pinned to the US dollar.
The advantage of DeFi is that you can stack decentralized applications (dApps) to maximise returns. For example, an investor might decide to buy DAI and then use Compound to lend it and earn interest. The decentralized nature of DeFi means everything can be done via your smartphone. In the future, it will probably6 be standard to buy property or land using dApps using smart contract agreements. Without the involvement of lawyers and agents, it will make the process a lot faster and cheaper.
Some high profile players are now involved with DeFi. The Interbank Network is being led by JP Morgan, ANZ, and Royal Bank of Canada, where 75 of the world’s biggest banks are trialing blockchain applications. The impact of Covid-19 means that DeFi could offer a much higher return than traditional institutions, with the pandemic driving down interest rates. With a platform like Compound, you can get an APY of 6.75% and the incentive of Comp tokens. DeFi is also the perfect answer for people without a bank account.
What is yield farming?
Yield farming is the cornerstone concept for DeFi from 2020. In June 2020, the Ethereum-based credit market Compound started to distribute its governance token, COMP, to the protocol’s user base. With the way the automatic distribution was structured, demand for the token initiated a craze and moved Compound into the leading position in DeFi.
1 Review
