By Simone Pomposi
The end of 2019 saw an increasing rise of interest around DeFi, or decentralized finance.
DeFi is “the notion that crypto entrepreneurs can recreate traditional financial instruments in a decentralized architecture” — Jeff Kauflin.
While Bitcoin was the first attempt at a rudimentary decentralized financial system — and has been specifically known as a store of value in the most recent times — , it was Ethereum that really created a more favourable environment for DeFi. The possibility to deploy dApps and smart contracts is what pushed developers to think outside of the box and unleash their creativity.
The first tangible result was MakerDAO, a decentralized platform whose users can create a stablecoin called DAI by using ETH and other ERC20 tokens as collateral.
The process is quite simple: you lock in any amount of ETH or supported ERC20 token, and you can borrow DAI, which is pegged 1:1 to the US Dollar, as long as you maintain at least a 150% collateral position.
For example, assuming that the price of 1 ETH = $100, if you lock in 1.5 ETH (worth $150), you can borrow up to 100 DAI. As in all collateralized positions, it’s always recommended to overcollateralize to avoid risks of liquidation.
You can use the newly borrowed DAI for anything you want, for example, sell it to buy other tokens or services, as long as you return it, paying interests, to free up your locked ETH.
All sorts of similar products and services recently gained popularity: Compound, Aave, Synthetix, Dharma, to name a few.
After the ICO craze of 2017, where people were trying to “blockchain” everything, it seems that DeFi is laying the foundations for substantial growth of the industry as a whole by doing something that does what everyone is looking for: simplify their lives.
On that note, UX is finally catching up with the underlying tech. People won’t use something that they have to learn how to use, especially with today’s low attention span.
In the end, the most successful products will be those that will be easier to use.
DeFi will foster an ecosystem that can be defined as the internet of assets. All linked by smart contracts and cross-chain bridges, these native digital assets will allow developers and users to create complex financial interactions that are simply not possible in legacy systems.
However, with the increase of participation, the platforms on which these products are built will play a fundamental role. Ethereum might not be up to the task, as scalability is still an unresolved issue.
Fantom, on the other hand, provides a much more scalable and secure infrastructure. It is fully compatible with Ethereum through the Ethereum Virtual Machine, and thanks to its aBFT consensus mechanism speed and finality are no longer an issue.
At the time of writing, 31 validators are securing the network and more than 40% of the circulating supply is staked.
It’s easy to see how next-generation DeFi products can leverage these precious characteristics for on-chain finance that is ready for real-world use.
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