Tag: Decentralized finance

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Crypto Daily Topic Cryptocurrencies

The Best Use Cases For Decentralized Finance Projects

There’s hardly a facet of our lives left untouched by blockchain technology. From the most ubiquitous to the complex of our engagements, its effects are discernible. But perhaps the one sector where its effects are most discernible is in finance. The shortfalls of the legacy financial systems provide the right environment for innovation to sprout. Fintech firms are outdoing themselves in the production of products and technologies aimed at bettering users’ experiences.

There’s hardly a facet of our lives left untouched by blockchain technology. From the most ubiquitous to the complex of our engagements, its effects are discernible. But perhaps the one sector where its effects are most discernible is in finance. The shortfalls of the legacy financial systems provide the right environment for innovation to sprout. Fintech firms are outdoing themselves in the production of products and technologies aimed at bettering users’ experiences.

There’s hardly a facet of our lives left untouched by blockchain technology. From the most ubiquitous to the complex of our engagements, its effects are discernible. But perhaps the one sector where its effects are most discernible is in finance. The shortfalls of the legacy financial systems provide the right environment for innovation to sprout. Fintech firms are outdoing themselves in the production of products and technologies aimed at bettering users’ experiences.

This year has seen the emergence of many disruptive technologies. However, non features as prominently as decentralized finance(DeFi). DeFi is technology’s response to an inadequate financial system. 

In this article, we tackle two significant aspects of Defi. First, the significance of Defi projects. We also present the best use cases to give you insight into this revolutionary technology. 

Let’s get into it!

What is the Significance of Decentralized Finance Projects?

Defi projects are universally beneficial. The buzz they continue to generate emphasizes this truth. Here’re a few of the benefits associated with them:

  • They streamline transactions- smart contracts execute exchanges increasing efficiencies.
  • Increase the security of transactions- they draw on the Ethereum blockchain’s Immutability to secure trades.
  • They are scalable- Ethereum’s composable software ensures that DeFi protocols and applications are interoperable, giving the developers and product the flexibility to build on top of existing ones. 
  • Increase transparency of transactions- distributed ledger technology enables one’s peers to access and verify their transactions, curbing fraud.
  • It is permissionless- DeFi facilitates anyone with a crypto wallet and the Internet to access its applications regardless of their location.
  • Gives the user control over their data- Web3 wallets like MetaMask interact with permissionless dAapps and protocols to provide users custody of their assets data. 

What are the Best Use Cases for Decentralized Finance?

From the preceding, it is clear that DeFi projects are beneficial. The question then arises, where can we best use this technology? DeFi technology has wide usage. The following are some of the prominent use cases.  

i) Management Of Assets

DeFi protocols give users full custody of their funds. Additionally, Crypto wallets help one easily and securely interact with decentralized applications (dApps) for different transactions. These transactions range from trading and transferring crypto to earning interest on their crypto holdings. Tracking one’s assets becomes easy this way.

ii) Gaming

Defi platforms are interoperable. This feature has opened up opportunities for developers to build cross-platform protocols across a variety of verticals. 

Ethereum-based games have gained popularity due to their inbuilt economies and rewards. Take the case of the PoolTogether game. Its users acquire digital tickets using the DAI stable coin. They then pool their tokens for lending on the Compound money market.

iii) Provision of Credit

DeFi allows the creation of P2P lending pools and borrowing contracts. For instance, Compound -an autonomous interest rate protocol- integrates with most DeFi platforms, enabling users to earn interest in crypto that they’ve lent.

Compound’s smart contract automatically matches creditors to borrowers. Additionally, it determines interest rates by comparing the volume of the borrowed to supplied funds.

iv) Decentralized Exchanges

Decentralized exchanges (DEXs) are crypto trading platforms allowing P2P transactions. They achieve this by eliminating central authorities. As they’re non-custodial, they mitigate price manipulation, hacking, and theft.

DEXs are the mainstay of token projects. They enhance their access to affordable liquidity as they allow projects to list without fees. This way, they differ significantly from centralized exchanges that charge higher prices per listing.

The degree of decentralization varies with the exchange. Whereas exchanges may centrally host order books and other aspects of a users’ account, they don’t hold their private keys. Examples of popular DEXs in the DeFi space currently include AirSwap, Liquality, Mesa, Oasis, and Uniswap.

v) Decentralized Insurance

Investing in cryptos (DeFi included) comes with its fair share of risks. As such, different products that hedge against risks in this space are available. They help protect against market crashes, hackings, failure of smart contacts, among others. Nexus Mutual is one such example.

The players within the Defi space underwrite the risk. That is to say, they pool resources to acquire the premium providing the cover. Utilizing smart contracts makes the products transparent. Anyone can access the payout terms via the Blockchain.

vi) Issuance of Synthetic Assets

Synthetic assets are tokenized representations of derivatives. An Ethereum based smart contract locks them to the Blockchain. These derivatives may represent real-world assets, including fiat currencies, bonds, commodities, or even cryptos.

Synthetic assets are tradeable. Consequently, they allow the disposal and acquisition of assets that are illiquid or difficult to obtain. The Synthetix protocol is essential to their issuance. It employs a 750% collateralization ratio that guards against price shocks.

vii) Liquidity Mining

Liquidity Mining, also known as yield farming, is holding digital assets for rewards. Through smart contracts, owners of crypto assets get incentives for keeping rather than trading them.

Participation in these projects requires stacking liquidity provider (LP) tokens. One obtains these through providing liquidity to a DEX, such as UNISWAP. Users then stake their tokens to mind new ones for exchange.

viii) Identity Management

Traditional financial systems rely on KYC guidelines to comply with AML and CFT regulations. Defi, on the other hand, uses Know- your-transactions (KYT) protocols to deter fraud and other financial crimes. KYT uses the behavior of participating addresses rather than individual IDs to assess and stem the risk for financial crime. The assessment is in real-time. 

ix) Enhancing Financial Inclusion

In tandem with Blockchain-based identity systems, DeFi opens up financial opportunities to those previously excluded. It eases collateralization requirements for those seeking credit. Again it delinks creditworthiness from such aspects as income and ownership of property. Instead, it shifts it to attributes like financial reputation and activity. 

x) Development of Stablecoins

A stablecoin is a cryptocurrency whose value depends on a stable asset or group of assets. The supporting assets could be fiat commodities or other cryptocurrencies.

Intended to mitigate the volatility of cryptos, they have found a home in the DeFi space. They are essential in remittances, borrowing, and lending. Another area they’re gaining prominence in is the Central Banks Digital Currencies.

xi) Provision of Marketplaces

Many marketplaces have arisen to exploit DeFi functions. These allow P2P exchanges globally. From them, traders and consumers enjoy a wide variety of products and services.

Final Thoughts

The year 2020 could be defined as the year of Defi. During this period, interest in this disruptive technology peaked. The heightened interest attests to its significance. Not only will it increase access to financial services, but also ease transactions besides securing them. The technology has wide useability. For instance, it is essential in credit provision, creating market places, and even combating financial crimes. Even though it is still developing, it has shown the potential to alter our economic landscape for the better. As we expand research and development in the area, we can only look forward to exciting products and solutions in the space.

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Crypto Guides

How DeFi Is Solving The Problem That Bitcoin Always Wanted To?

Introduction 

Introduction 

Introduction 

When you hear the word ‘cryptocurrency,’ Bitcoin is the first thing that pops into your mind. For the longest time, bitcoin has been synonymous with cryptocurrency and regarded as the future currency. In the recent past, bitcoin’s monopoly has been diluted by the entrance of thousands of other cryptocurrencies.

The cryptocurrencies’ primary objective was to serve as an alternative, and down the line, a replacement to the global fiat financial system. This objective has failed to take off. This failure can be attributed to the skepticism cryptocurrencies have faced, which has slowed their role as a legitimate alternative to fiat currencies. DeFi has helped address some of these challenges and help make cryptocurrencies mainstream.

What is DeFi?

DeFi is the short form for Decentralised Finance.  At its core, decentralized finance is the provision of conventional financial services on platforms built on the public blockchain. Specifically, DeFi is based on the Ethereum blockchain platform.

DeFi is heralded as the most suitable alternative to the global financial system. This new enthusiasm about the decentralization of finance is owed to the fact that DeFi is seen as being able to solve the problems that bitcoin failed to solve.

Advancements Made by DeFi

Here are some of the advancements made DeFi, which bitcoin failed to achieve.

Creation of issuance and investing platform

These platforms operate like an ordinary stock exchange. DeFi has made it possible so that cryptocurrencies can be issued and traded like conventional financial securities. The platform brings together broker-dealers, legal advisors, and custodians, who will advise issuers through the process. Furthermore, the platform also makes it possible for asset and investment managers’ proliferation for crypto-based financial assets.

Establishment of a decentralized prediction market

A prediction market is one where individuals can bet on any future occurrences. With decentralized prediction markets, there is no form of censorship whatsoever. Therefore, it offers an incredible opportunity to hedge against future risks financially and speculate on all forms of social events globally.

Growth of open lending protocols

Decentralized open lending championed by DeFi involves the following: collateralization of cryptocurrencies; elimination of credit checks among borrowers; lending and borrowing of cryptocurrencies for trading purposes; and real-time settlement of transactions. The financial inclusion resulting from open lending is unparalleled.

Facilitated the issuance of stablecoins

DeFi made it possible for the issuance of stablecoins by facilitating the auditing of crypto reserves and ensuring manageable volatility of such cryptocurrencies. With DeFi, stablecoins can be pegged on another asset. Categories of stable coins that have been spurred by DeFi include crypto-collateralized stablecoins, fiat-collateralized stable coins, and non-collateralized stablecoins whose stability depends on an algorithm controlling the expansion and contraction of its supply.

Bottom Line

DeFi undoubtedly offers a higher potential for financial inclusion, censorship-free transactions, and improved privacy. Although DeFi is offered as an alternative to the centralized financial system, it is almost impossible to envision an economy where the centralized financial system ceases to exist. Thus, it is prudent to co-mingle the two systems to ensure complementarity, which will tone down the inherent risks associated with either system.

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Crypto Videos

The Craze Behind DeFi – Explained!

https://youtu.be/VgFS4GWT5EA

https://youtu.be/VgFS4GWT5EA

 

The Craze Behind DeFi – Explained

There are many reasons that the DeFi sector has been experiencing a surge of interest lately.
First off, we need to mention that the regulators have been behind the curve in terms of DeFi, which has been able to flourish in this vacuum. As an example, in traditional unsecured lending, a legal requirement that lenders and borrowers know one another’s identities exists. On top of that, the lender always assesses the borrower’s ability to repay their debt. In DeFi, on the other hand, there are no such requirements. Instead, every part of the process is about mutual trust and preserving privacy.

Regulators always have to weigh the delicate balance between deterring innovation and failing to protect society from risks. In July, the US SEC made a major shift towards embracing decentralized finance by approving an Ethereum-based fund called Arca.
This is welcome and extremely important since one of the major challenges with financial innovation is the hostile environment that is created by archaic regulations. This had caused many cryptos and DeFi projects to fail, including major ones such as Basis, which returned $133 million to investors back in 2018 when it concluded that it couldn’t work within the SEC rules.


The second reason for the DeFi craze is that mainstream players are not-so-slowly and surely getting involved. Many financial institutions are beginning to accept DeFi, as well as seeking ways to participate. Seventy-five of the world’s biggest banks are now trialing blockchain technology to speed up their payment system as part of the Interbank Information Network, led by JP Morgan, Royal Bank of Canada, and ANZ. Even though most of these banks are testing centralized versions of blockchain, this is one step closer to DeFi than the current system.
Major asset management funds are starting to get interested in DeFi seriously as well, with the most prominent one being Grayscale, the world’s largest crypto investment fund.

The third reason for the craze is the effect of COVID-19. The pandemic has evidently driven global interest rates even lower, with some jurisdictions, such as the eurozone, now offering negative interest rates.
DeFi potentially offers much higher returns on investment to savers than high-street institutions. As an example, Compound has been offering an annualized interest rate of 6.75% for people that save with stablecoin Tether. Not only do you get the interest, but you also receive Comp tokens, which adds to the attraction of this offer. With as much as two-thirds of people without bank accounts having a smartphone, DeFi also has the potential to offer its services to the so-called unbanked.

One final reason for the surge in people putting money into DeFi projects is FOMO – fear of missing out. Many tokens are worth nothing or very close to nothing in terms of their utility, so we see a lot of irrational investment and pure speculation. But, people see certain tokens rise in value exponentially and want to turn their life around as well.
Like it or not, we are certainly heading towards a new financial system that will be more liberalized and decentralized than before, and DeFi will be at the forefront of these changes.

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Crypto Guides

A Brief Introduction To SushiSwap – An Evolution DeFi Project of UniSwap

Introduction

Introduction

Introduction

SushiSwap copied the mechanics of the most popular DeFi protocol known as “Uniswap” and challenged it, openly with new cryptocurrency trading features. We can consider SushiSwap as a Uniswap rivalry. The SUSHI token holders are provided with a share of the SushiSwap trading commission, and incentives are given to the liquidity providers.

It’s a community governed crypto trading platform as the SUSHI holders have the power to make governance decisions. SushiSwap made a strong strategy to give tough competition to Uniswap by paying temporarily extra-large SUSHI rewards to the first two-week liquidity providers. 

What is SushiSwap, and how does it work?

Before you start understanding SushiSwap, you must know about Uniswap. Uniswap is an exchange protocol of DeFi which executes operations without any order book. It follows a model known as automated market-making (AMM), where funds are released by liquidity providers in the pools. 

SushiSwap is a similar copy of Uniswap with few differences mainly – the SUSHI token. These tokens majorly have two functions at the time of launch: authorize the holder with administration rights, and a share of fees is paid to them from the protocol commission. In simple words, SUSHI token holders have “ownership” of the protocol. The community accepted SushiSwap at a large scale because tokens distributed by this provide liquidity incentives that grant the holders with governance rights. In addition, the SUSHI holders are also rewarded with a share of fees paid by traders in the protocol. 

With these governance rights, the token holders can vote for any suggested SushiSwap Improvement Proposal (PIP). Therefore, they play a great role in bringing any minor or major changes in the protocol. So, the whole development and execution process of SushiSwap depends on SUSHI holders, and for any successful token projects, a strong community is always a true asset. 

How are SUSHI rewards distributed?

‘Liquidity mining’ is the mode through which Sushi is distributed. SUSHI is given to those liquidity providers who specifically invest in 13 Uniswap pools. Later on, the Uniswap LP tokens can be deposited by such liquidity providers to SushiSwap staking contracts for earning SUSHI. 

Initially, the 13 Uniswap pools were as follows:

USDT-ETH, USDC-ETH, DAI-ETH, USD-ETH, COMP-ETH, LEND-ETH, SNX-ETH, UMA-ETH, 
LINK-ETH, BAND-ETH, AMPL-ETH, YFI-ETH, SUSHI-ETH
The SUSHI-ETH pool provides the investors with double rewards in return. According to the protocol, a new token will be punched each time a block is extracted on Ethereum’s network, and the distribution is initialized with Ethereum block 10,750,000. The target is to stamp out 100 new SUSHI tokens for each block, but for the starting 100000 blocks, 1000 SUSHI tokens will be created per block, and after that, the rewards will be reduced. This procedure is adopted to provide incentives to early investors in the protocol in order to encourage them for Liquidity Migration. 

Once 100000 Ethereum blocks are extracted and the tokens generated will be migrated for liquidity into the SushiSwap contract. In the process, all the Uniswap tokens staked on will be reclaimed to initialize a new pool of tokens. Once the liquidity migration is over to fuel the first SushiSwap pools, then immediate operations will be activated in the protocol. The investors, without any extra effort, will receive SUSHI token share for providing liquidity for further processing. 

Conclusion

SushiSwap challenged the current most successful DeFi protocol called Uniswap. This company is providing high returns to token holders and governance rights to its community. Irrespective of the SushiSwap’s success, it has proved that no protocol in DeFi is accurate.

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Crypto Guides

What Should You Know About ‘Automated DeFi-Styled Market Pool’ Launched By Binance

Introduction

Introduction

Introduction

The leading global cryptocurrency exchange “Binance” launched an automated DeFi-styled market pool for cryptocurrency investors to offer them with instant token swapping functionality. Binance officially brought this new trading platform from the decentralized finance (DeFi).

The platform will allow the money maker to deal with smart contracts. The cryptocurrency exchange system announced that it is an automated market maker (AMM) pool. The users are not only allowed to trade with funds but can also host liquidity pools. For the first time, an AMM pool is attached to the centralized trading exchange system. 

Binance Liquid Swap Product

The AMM pool product called “Binance Liquid Swap” will allow the users to keep their crypto funds in the pools for providing liquidity to the market. In return, they will earn the interest and share from the pool trading commission. They implemented an AMM model for pricing to provide users with stable pricing and low fees.

The AMM exchange model uses a predefined algorithm for pool liquidity to make markets. The exchanges provide liquidity to the pools regardless of the user’s token prior order size. The reward system and trading fee are yet to be disclosed. 

To start, the AMM pool provides the following trading pairs :

  • USDT/BUSD
  • USDT/DAI
  • BUSD/DAI

The security of the product is strengthened due to the Binance platform and also because of its move into the DeFi space with the launch of Binance Smart Chain. The smart chain is a highly performing Ethereum virtual machine. It is compatible with blockchain and works in parallel with the Binance chain. It offers users with smart contracts and allows them to stake a Binance coin. 

Binance Jump in DeFi 

In Binance, the liquid swap transaction fees and prices on AMM depend upon the asset number in each liquidity pool. The prices vary when currencies are added, removed, or swapped in the pool. The trader’s share in the pool will be collected every 7-day as an annual percentage yield (APY). The profit generated will be turned into assets for the respective pools. Binance introduced AMM pools to centralized exchange systems for more safety, security, and credibility.

As the decentralized Ethereum pool is highly risky due to huge market price fluctuations; hence, Binance went for the centralized approach, which would most probably minimize the big margin loss. The Binance is working to deliver instant swap liquidity in order to attract more participants and to incentivize the pool contributors for the community benefit. 

Conclusion

Binance designed this new DeFi “Binance Liquid Swap” having different liquidity pools so that users can earn income instantly and easily without much effort. The centralized AMM pool offers users to buy, stake, and trade their crypto assets. The instant swapping functionality will be executed via a centralized platform.

The users will be able to earn through interest and trading commission from the shares. This centralized platform is able to provide stable transaction prices and lower fees. The DeFi products perform better in the market if more investors are involved in providing liquidity to trade. Hence, to attract more liquidity providers, Binance is providing rewards in return. 

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Crypto Videos

Crypto News – DeFi Adoption Two Ways Ahead!

https://youtu.be/1iulNMHZoRU

https://youtu.be/1iulNMHZoRU

 

DeFi Adoption – Two Ways Ahead

As decentralized finance starts to gain ground, co-founder of Chainlink Sergey Nazarov believes that there are two ways for more DeFi mainstream adoption.
Nazarov spoke about DeFi at the Smart Contract Summit, where he said he sees two main ways the new technology “crosses the chasm” and makes more Web 2.0 companies actually adopt these technologies.
“The transition can occur in two different key dynamics. The slower path would be the interest yield. We are, at the moment, in a low-interest environment, and the appetite to combat yield will become massive. The second, faster path, is through counter-party risk. This is where the solvency of the brand-based guarantees erodes and where the math-based contractual guarantees come in. While the slow case is compelling, the fast path is scary, but we should be seeing both.”

He also added one of the exciting possibilities for DeFi, which is when people start thinking of blockchain when looking for financial products. This would effectively transition the idea that blockchain is for tokens only into something much larger. He said that the industry would eventually see investors openly talking about their crypto holdings, but that this will only happen after crypto proves that it has superior value over other financial products. Also, this is the time where people would stop holding crypto only as a means of diversification.
Nazarov noted that information, such as market data, is always essential, but stressed that privacy is as well. He pointed to its newest acquisition, called DECO. The DECO protocol uses zero-knowledge proofs and advanced cryptography to provide enhanced privacy to users.

Nazarov is a well-known crypto bull and one of the people behind Chainlink. Its LINK token saw a meteoric rise in 2020 as interest in it, as well as DeFi, is at an all-time high. Chainlink is currently holding the 5th place when it comes to crypto market cap, just recently surpassing Bitcoin Cash and Litecoin.

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Crypto Guides

Tokenized Bitcoin on Ethereum – Explained

Introduction

Introduction

Introduction

Bitcoin owns a stable use case and plays an active role in the industry as a public good. Although, it has limited features, leaving almost a very little space for future innovations encouraging Bitcoiners to explore what else can be done with Bitcoin. From this, an idea evolved that Bitcoin can be used on other blockchains. This is how we reached to tokenized Bitcoin on Ethereum. As the name suggests, Bitcoin is tokenized so that it can be used on other blockchains.   

What is Bitcoin?

Bitcoin is a reserved asset in the cryptocurrency world. It has the highest adoption rate, highest trading volume, best liquidity, and holding a superior position in the crypto capitalization market. In fact, entrepreneurs believe that Bitcoin can serve all required purposes in the market, so there is no need for any other cryptocurrency. Bitcoin with an uppercase b is a network whereas with a lowercase b is a unit of account. 

What is Bitcoin Tokenization?

The tokenization of Bitcoin means processing it to deliver a blockchain security token, specifically having real tradable value. Security tokens can refer to company shares, real estate ownership, or investment fund. These can be used as exchange units for trade in a secondary market. 

Why tokenize Bitcoin on Ethereum?

Bitcoin is designed to deal with a few things only and has inherent limitations, but we know that it is the most valuable crypto out there. Technically, we can execute smart contracts using Bitcoin, but it has limited opportunities as compared to Ethereum. Bitcoin is an amount we are holding, while Ethereum provides us with an opportunity to build something with it. 

Tokenising bitcoin in other networks can improve its utility. It can enable various functionality that the native Bitcoin doesn’t support. The security model and core functionalities of Bitcoin remain constant, with other advantages like the increased speed of transactions, high privacy, and tangibility.

DeFi was raised with a potential composability idea, which means the same public is executing the applications. It is an open-source platform with a permissionless base layer so that all the users can work together seamlessly. The composable layer of Bitcoin has introduced a new form of financial framework blocks that could enable is to implement Bitcoin in various types of applications.

You can tokenize Bitcoin on various blockchains like Ethereum. All are having different degrees of decentralization, various assumptions regarding risk factors, and trust issues. Transactions with the launch of Ethereum become cheaper and faster. But it’s quite dangerous also if the holder loses bitcoin due to any contract bug as there will be no alternative way to unlock those bitcoins on the blockchain. 

Conclusion

The prime reason behind tokenizing bitcoin on Ethereum is to enhance bitcoin’s utility. Ethereum has captured significant share in bitcoin transactions; there is an increase in the involvement of Ethereum in the global network for value transactions. Blockchain industries are developing to bridge the gap between the cryptocurrency networks.

The tokenization of bitcoin created a new financial scheme that is more efficient, vast, and democratic. Through tokenization, players in the traditional market are growing rapidly, and new contenders are showing interest in adopting the technology. 

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Crypto Guides

Understanding The Topical Problems In The DeFi Ecosystem

Introduction Decentralized finance or DeFi is a collective term given to a wide range of products and technologies that help manage the finances more innovatively without the interference of the central bank or any financial institution. The decentralized applications that are generally are called DApps built on top blockchain like Ethereum and Bitcoin. The major […]

Introduction Decentralized finance or DeFi is a collective term given to a wide range of products and technologies that help manage the finances more innovatively without the interference of the central bank or any financial institution. The decentralized applications that are generally are called DApps built on top blockchain like Ethereum and Bitcoin. The major […]

Introduction

Decentralized finance or DeFi is a collective term given to a wide range of products and technologies that help manage the finances more innovatively without the interference of the central bank or any financial institution.

The decentralized applications that are generally are called DApps built on top blockchain like Ethereum and Bitcoin. The major highlight of DeFi is that they use smart contracts giving complete control over the finances. It helps in individual savings, payments, or investments, but it also facilitates better and efficient lending, margin trading, market predictions, etc.

With the help of DeFi tools, you can access the services that have any centralized authority. The significant idea behind launching DeFi is to make the entire process safer and more efficient than other traditional financial solutions. Though DeFi is efficient than other financial solutions, some roadblocks are preventing significant issues.

What Are The Major Problems Involved in Decentralized Finance?

Some of the major risks that revolve around DeFi are related to user errors, smart contracts, lack of insurance transparency, price mechanisms, etc. Irrespective of all the advantages DeFi holds, the initiative still remains an infant, making it vulnerable to risks.

Smart Contract Vulnerabilities

One of the significant issues that DeFi is going through is smart contract vulnerabilities. When a contract is released with a flawed code, it can result in fund losses. There have been instances where these particular issues with the smart contract have resulted in compromising blockchain.

User Error

The issue of smart contracts is also connected to an underlying problem of user error. Even if the code seems right, there can be some unexpected issues that can become a hindrance. Due to the user errors, millions of dollars have been lost in the name of DApps.

Internal Governance

Another crucial issue witnessed in DeFi is the internal governance and the external regulations of the assets. There are chances to control who can run and operate the platform. Along with that, the government can anytime issue regulations that can restrict the processes of DeFi.

Other Issues

Other common issues are related to the market unpredictability, lack of insurance, etc. that makes the individuals lose sums of money even if they haven’t made any mistake.

To realize the full potentials of DeFi, is essential to address the issue and find out how it can be managed. It is true that DeFi holds many advantages for the growth of the financial world. It depends on how well you utilize it by eliminating the issues.

The Future of DeFi

Addressing the current underlying issues of DeFi, there have been plenty of solutions that have emerged so far. For instance, Atomic Swaps and pTokens are likely to improve the DeFi and make it increasingly impressive for the finance industry.

The above mentioned were the major hindrances that are blocking the development of DeFi. Different types of solutions are being worked out to cater to the pain points of DeFi. With efficient use of bug bounties, audits, open-source commitments, etc., problems related to smart contracts and errors can become less frequent.

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Cryptocurrencies

Nexo Crypto Review: Nexo Tokens, Nexo Lending Platform & How It Works

The advent of blockchain and cryptocurrencies brought with it a ton of possibilities for the global finance industry. Gone are the days when banks and other financial institutions dominated the finance lending space. Thanks to blockchain, decentralized finance (DeFi) is now possible, and virtually anyone from all around the world can take part in the global financial system – and all they need is an internet connection. 

The advent of blockchain and cryptocurrencies brought with it a ton of possibilities for the global finance industry. Gone are the days when banks and other financial institutions dominated the finance lending space. Thanks to blockchain, decentralized finance (DeFi) is now possible, and virtually anyone from all around the world can take part in the global financial system – and all they need is an internet connection. 

The advent of blockchain and cryptocurrencies brought with it a ton of possibilities for the global finance industry. Gone are the days when banks and other financial institutions dominated the finance lending space. Thanks to blockchain, decentralized finance (DeFi) is now possible, and virtually anyone from all around the world can take part in the global financial system – and all they need is an internet connection. 

Nexo is a blockchain-based project that is fulfilling this promise by making it possible for individuals to access such financial services as loans while using their crypto assets as collateral. Individuals from over 200 countries can use their cryptocurrency to receive loans in 45 Fiat currencies – and all this in a transparent, automated, and tax-free process. 

But what is Nexo, and how does this lending platform work? We review this blockchain project to answer these questions and tell you everything else you need to know about the Nexo crypto-lending platform.

What is Nexo? 

Nexo is a blockchain-based lending platform that advances loans and financial assistance to different crypto holders. For the longest time, the crypto market was underexploited, and the only viable method of gaining from one’s crypto assets was by speculating their prices on the market. Nexo, however, seeks to change this by providing crypto investors with a platform where they can issue and borrow crypto loan services while using different crypto assets as collateral. 

Nexo is a product of Credissimo, a Europe-based fintech company launched in 2007. The company is one of the most well established and trusted brands in the online lending space. On their website, they claim to have 73% customer return rate, disbursed over 102, 800 loans in 2019, and maintains a portfolio of 370, 000 unique customers. 

How Does Nexo Work? 

Nexo leverages the blockchain network by providing users with instant lending solutions. With Nexo, crypto holders can get Fiat loans and set up their crypto assets as collateral. It makes it possible to monetize your crypto assets and remain liquid without losing ownership of the investment. The loans are forwarded to the borrower’s bank or debit card.

Nexo How it works - Forex Academy

Nexo is a wholly automated and highly versatile platform with a straightforward lending system.

All you need to do is deposit your crypto assets, access your Fiat loan, and repay it at your convenience. You can repay this loan with fiat, crypto, or a combination of both currencies. There are no minimum repayments with fiat. However, if you are paying back in crypto, the minimum repayment deposits are 0.0025 for Bitcoin, 0.025 for Ether, 32.00 for Ripple, 5.00 for TrueUSD, and 5.00 for USDC. See here the full list for minimum crypto repayments. 

In addition to loans, Nexo also offers its clients with a savings account with an ROI of 8% for stablecoins and fiat currencies. The platform has partnered with BitGo, a digital asset trust to secure all crypto funds. Currently, Nexo supports Bitcoin, Ethereum, Pax Gold, Ripple, Litecoin, Binance, Stellar, NEXO, Bitcoin Cash, EOS, and various stablecoins. 

The Nexo product is available globally – except for a few countries like Bulgaria, Cote d’Ivoire, Myanmar, Iran, Iraq, North Korea, Libya, Syria, and Zimbabwe.

More importantly, Nexo enables you to avoid capital gains taxes even if you live in countries with crypto tax legislation. On their website, Nexo argues that “when you take a crypto loan and spend that loan, you avoid paying any capital gains taxes, which otherwise in many countries you have to pay when you sell your crypto.”

Who Can Use Nexo? 

The NEXO platform is a pretty open platform. Any of the following individuals/entities can utilize NEXO services. 

  • Investors who desire to make profits off their crypto assets, while still maintaining ownership of those assets
  • Businesses of all sizes
  • Crypto miners
  • Hedge funds
  • Pension funds

The Nexo Oracle 

The Nexo Oracle is the technology that drives almost all of Nexo’s functionalities. Some of its core strengths include:

I) Developing loan contracts

The Oracle picks up and automates all the processes after a credit line application is initiated. This includes disbursement of funds, asset monitoring, notifications, and the overall administrative procedures of the loan. 

II)  Developing and maintaining real-time data

The Oracle aggregates data from at least six independent exchanges to perform accurate, real-time data aggregation to minimize the risk for both the platform and users. It also detects market moves and readjusts loan limits accordingly. If an asset increases in price, the Oracle automatically increases the loan limit. 

III) Maintaining an analytics module

The Oracle automatically records and manages all interactions with clients – including loans, repayments, outstanding balances, and accounts. 

IV) Conducting auto-notifications

All of Nexo’s processes are automatically executed, and this includes sending notifications to clients. 

V) Developing prediction modeling and algorithms

Nexo utilizes big-data analysis, automated algorithms, and predictive modeling techniques to realize the smooth running of the system. This helps ensure that information aggregated from outside sources is used appropriately and promptly. 

The Nexo Team

Nexo involves a core team of 14, who hold influential positions in Credissimo. Chief managing partner Kosta Kantchev is the co-founder of both Nexo and Credissimo. 

Antoni Trenchev is the managing partner and also co-founder of Nexo. Trenchev is a former member of the National Assembly of Bulgaria and has a background in e-commerce development, strategy, and processes.

Georgi Shulev is also a managing partner and co-founder of Nexo. Shulev has long-running experience in investment banking and is the co-founder of Consestimate – a financial estimate platform where investors share ideas and forecasts with peers and identify the “fundamental value of public companies.”

The NEXO Token 

Nexo token - Forex Academy

The NEXO token is the native token of the Nexo platform. And the Nexo project creators define the token as a security instrument that’s compliant with the United States Securities and Exchange Commission (SEC) regulations. The Nexo platform incentivizes users to hold the NEXO token by paying out dividends derived from loan returns. Here, 30% of loan returns are channeled to a dividend pool and distributed to the coin holders. 

At the time of writing, the coin is trading at $0.122583, ranking at #81 in the market. It has a market cap of $68,646,212, and a 24-hour volume of $4,089,490. The coin has a circulating supply of 560,000,011, with a total supply of 1,000,000,000 Nexo Tokens. The coin’s all-time high was $0.539466 (May 07, 2018), with an all-time low of 0.043333 (Sep 12, 2018). 

Where to Buy and Store NEXO

You can purchase NEXO from several reputable exchanges, including IDEX, Huobi, Coinswitch, YoBit.Net, Huobi, Binance, HotBit, and Changelly. The majority of these will require you to trade other cryptocurrencies, such as Ethereum and Bitcoin, to get  NEXO. 

NEXO is an Ethereum-based token, meaning it can be stored in any Ethereum-compatible wallet such as MyEtherWallet, MetaMask, Ledger, Trezor, or Atomic Wallet.

Final Thoughts

Nexo brings real value and utility to crypto users and the crypto space. Users can leverage their crypto holdings to gain access to Fiat loans without the plethora of the terms and conditions of traditional finance. Nexo users can also earn passively by keeping their money on Nexo and letting it work for them. It will be interesting to see how Nexo advances as a platform and how its offerings will continue to evolve. 

Categories
Cryptocurrencies

Synthetix: How Does this DeFi Platform Work?

Satoshi Nakamoto’s vision for Bitcoin was money that could not be controlled by governments and regulators. Little did he know, though, that the underlying technology of Bitcoin – blockchain, wielded so much potential for the realization of this goal in a way that Bitcoin itself (alone) could never accomplish. 

Satoshi Nakamoto’s vision for Bitcoin was money that could not be controlled by governments and regulators. Little did he know, though, that the underlying technology of Bitcoin – blockchain, wielded so much potential for the realization of this goal in a way that Bitcoin itself (alone) could never accomplish. 

Satoshi Nakamoto’s vision for Bitcoin was money that could not be controlled by governments and regulators. Little did he know, though, that the underlying technology of Bitcoin – blockchain, wielded so much potential for the realization of this goal in a way that Bitcoin itself (alone) could never accomplish. 

Thanks to the blockchain network, we are now experimenting with the idea of a decentralized finance industry – whose vision is to empower all economically – regardless of race, origin, or social status. 

Synthetix is a decentralized finance platform that makes it possible for anyone with an internet connection to access a wide variety of financial assets: from Fiat currency to gold, Bitcoin, commodities, and precious metals – without the need for costly brokers or intermediaries. 

But what is Synthetix, and how does this decentralized platform work? We answer these questions and everything else you need to know about Synthetix here. 

What is Synthetix? 

Synthetix is a decentralized finance platform built on the Ethereum blockchain. It hosts tokens, commonly referred to as Synths, that are tied to the value of liquid assets like stocks, real-world currencies, cryptocurrencies, commodities, indices, and precious metals. These assets are held in the form of ERC-20 tokens. 

Synthetix started as ‘Havven,’ a stablecoin project, before rebranding to the current name. The platform’s native currency is known as the ‘SNX’ token. SNX powers the creation of Synths, as explained by the platform’s creators: “The platform uses a token called SNX (the Synthetix Network Token), and holding this token allows you to create Synths. You do this by locking SNX into a smart contract and minting Synths against this value. To ensure Synths are fully booked, the system will only allow you to issue a fraction of the SNX value you lock.”

The question you’d ask is: “Why would I hold a synthetic asset instead of the real-life asset?” Well, the main reason an individual would hold a synthetic asset is to receive a benefit that the asset itself would not provide. This could range from getting access, e.g., to gold – without the real-world implications of custody, or wanting to gain liquidity for an asset that will be hard to sell quickly enough in the real world. Synthetix users do not only get this, but they get to do so on a decentralized, peer-to-peer, and transparent platform. 

How Does Synthetix Work?

The Synthetix platform utilizes two types of tokens: the main token known as Synthetix (SNX), and a second token known as Synth. Synthetix works in a pretty straightforward manner. 

Users purchase and lock SNX in their wallets. They can then create Synths, which will track the real-life price of the assets. The price of a Synth is arrived at via oracles provided by the Chainlink network. Users can also trade Synths via the Synthetix Exchange. This allows them to convert these tokens into a form whose price they can track in different ways. For instance, there is ‘sBTC,’ which allows individuals to track Bitcoin prices, as well as iBTC, whose price moves contrarily to that of Bitcoin. 

By virtue of holding Synth tokens, Synthetix users have access to endless possibilities in trading, hedging, remittance of funds, making payments, and building a portfolio.

Whose Idea is Synthetix? 

Synthetix is the brainchild of crypto payment company blueshyft CEO Kain Warwick. Warwick conceived the idea of Havven in 2016 when looking for a solution to solve the issue of arbitrage in crypto prices in smaller crypto markets like Australia and Korea.

How Does Synthetix Remain Collateralized?

The primary concern on the same platform is what will happen if Synths began moving inversely with the underlying SNX tokens. How would the system stay collateralized if, say, the price of SNX is falling, while that of Synths rising? 

Thankfully, the platform is designed to have infinite liquidity, which, when combined with various features baked into the system, maintains the collateralization of the platform. Below, we’ll take an in-depth look into each of these features.

#1. The Requirement of 750% Collateralization

For the Synthetix system to issue new Synths, it needs to have collateralization of at least 750%. The collateral cushions the Synths in circulation from unexpected price swings.

#2. Debt-driven

Synthetix is designed in a manner that when a user mints Synth, their SNX collateral is locked up – with the Synths acting as outstanding debt. If you want to unlock your Synths, you first need to offset your debt by burning Synths that are equivalent to the value of the Synths they had issued earlier.

The minimum of 750% in collateral ensures that users can easily buy back and sell their own debt if they so wish.

#3. Debt Pools

On the Synthetix platform, there is personal debt for users who have created Synths. But there is also a universal debt underlying all the Synths in circulation. 

A user’s personal debt is calculated as an ever-in-flux percentage of the total Synths issued, together with the exchange rates of the underlying asset and that of the issued Synths. 

This means Synth issuers do not need to pay back their debt with the exact type of Synth that they minted. An individual who issued a Synth can repay the debt with any other type of Synth, provided it’s equal in market value to the Synths they wish to burn.

This mechanism lends the system ‘infinite’ liquidity, which also enables endless shifts between Synths – without upsetting the system’s balance. 

The Synthetix Exchange

Synthetix blockcian logo | Forex Academy

The Synthetix decentralized exchange allows users to buy and sell Synths via smart contracts, removing the need for counterparties or third parties. Anyone can access via a web3 wallet, allowing them to easily and quickly buy or sell Synths and SNX tokens. 

All exchanges have a fee of 0.30%. The fees are given to SNX holders as a reward for providing collateral for the Synths in circulation. 

Synthetix’s Monetary Policy

The Synthetix system also has a monetary inflation policy for SNX embedded in the code, with the total supply of SNX in circulation increasing in a five-year span – from 2019 to 2024 –  from 100 million to 250 million. 

This monetary policy was not originally part of the system. It was added when it became apparent that the exchange fees from Synth transactions were too low to incentivize SNX token holders to hold up SNX as collateral.

The additional SNX will be distributed among SNX holders who have held their SNX as collateral. This will incentivize users to contribute to the system and support the network before it’s robust and independent enough for everything to run as intended. 

Another benefit of the inflation policy is that it will make the network more secure by automatically adjusting that collateralization ratio by the adding of extra collateral to SNX holders.

Synthetix’s Exchange Fees and Staking Rewards

Anyone can buy SNX, mint Synth, and take on its debt. This qualifies one to become a staker in the Synthetix ecosystem and start collecting staking rewards  – which are a percentage of the exchange fees – set at 0.3% for every transaction.  

All exchange fees are transferred to a collective pool, after which they are distributed to SNX token holders in proportion to their outstanding debt. In this way, users can increase their staking rewards by simply increasing their SNX issuance. 

However, users can only claim to stake rewards if their collateralization ratio is above 750%. This is meant to incentivize users to actively maintain a personal collateralization ratio of 750% or above, which helps to maintain liquidity of the network.

Tokenomics of Synthetix 

SNX is currently ranking at #49, with a market cap of $146, 971, 014, and a circulating supply of 181, 454, 898. It has a total supply of 182, 701, 142, with a 24-hour volume of $995, 620. The token has an all-time high of $1.57 (24th Nov 2019) and an all-time low of $0. 032420 (5th Jan 2019). 

Where to Buy and Store Synthetix

You can purchase or exchange cryptocurrency for SNX in any of several popular exchanges, including Coinbase, Bittrex, gate.io, Liquid, and Kucoin. 

As an Ethereum-based token, SNX and Synths can be stored in any Ethereum-compatible wallet. Popular options include MyEtherWallet, MetaMask wallet, Ethaddress Wallet, Ledger Nano, Guarda Wallet, Atomic Wallet, Trezor, Sugi, Keep Key, and Jaxx Liberty. 

Conclusion

The Synthetix platform offers a decentralized, peer-to-peer, accessible-for-all platform where users get exposure to all kinds of real-world assets without the burden of acquiring ownership and other barriers. The platform has the potential to create a powerful tokenized asset platform that can shake the whole financial market. The success of this platform will be a part of Satoshi’s grand vision, even if not in the way that they envisaged it. 

Categories
Cryptocurrencies

Exciting Use Cases of Decentralized Finance

Today’s finance landscape is inherently unequal – with millions locked out of opportunities due to their location, being undocumented, or having low economic means.  Few would have foreseen that the technology that brought us Bitcoin could potentially solve this enduring problem.  Decentralized finance (DeFi) is all of these things: an idea, a belief system, a […]

Today’s finance landscape is inherently unequal – with millions locked out of opportunities due to their location, being undocumented, or having low economic means.  Few would have foreseen that the technology that brought us Bitcoin could potentially solve this enduring problem.  Decentralized finance (DeFi) is all of these things: an idea, a belief system, a […]

Today’s finance landscape is inherently unequal – with millions locked out of opportunities due to their location, being undocumented, or having low economic means. 

Few would have foreseen that the technology that brought us Bitcoin could potentially solve this enduring problem. 

Decentralized finance (DeFi) is all of these things: an idea, a belief system, a movement, and a blockchain-based technology that promises to eradicate the aforementioned barriers to financial access, or to put it another way, to democratize finance. Already, decentralized finance is making waves as DeFi platforms and products increase by the day. 

In this guide, we explore some uses cases of this new and exciting technology, as well as some of the real-life applications that are making brave inroads into the space. 

But before we do that, let’s kick off with a primer on what exactly DeFi is, plus why we need it. 

What is Decentralized Finance? 

Decentralized finance is an emerging, blockchain-based ecosystem of finance that seeks to expand finance.  

It aims to make financial services more accessible and inclusive for everyone by making financial markets and products open-source, transparent, and under no particular authority. 

In DeFi world, everyone would have absolute control over their assets and interact with other participants through peer-to-peer (P2P), decentralized applications (DApps). 

What Problems Does DeFi Solve? 

DeFi’s chief goal is to decentralize financial services and make them available to all – an aspect that today’s centralized financial system is sorely lacking. As such, DeFi solves two main problems which we’ll look at in greater detail below: 

Inequality in Finance. Today, millions of people are locked out of access to loans, mortgages, a bank account, savings, insurance, and so on. DeFi aims to eradicate or alleviate this problem by creating a finance system that has no systemic or institutional barriers. All one would need is a smartphone and internet connectivity to access services.  

Financial Censorship. Today’s centralized finance system means that governments, banks, or intermediaries can restrict or prevent an individual’s or a company’s access to their assets. For example, the government could freeze the assets of a company that openly defies it, or an individual that it perceives to be rogue. By contrast, with DeFi, financial products are under no one’s control. Hence no one can arbitrarily restrict an individual’s or company’s assets. 

What Are the Advantages of DeFi?

Why should you care about DeFi? What difference does it propose to the current financial system? These are some of the advantages of DeFi: 

Autonomy: DeFi applications do not need a go-between party in transactions or an arbitrator in case of disputes. All terms are set in the code, and users have complete autonomy over their funds at any time. This eliminates the costs that would go into providing such intermediary services.   

Security: Since DeFi services are set up on decentralized blockchains, single points of failure are eliminated. Data is recorded on the blockchain and distributed across computers all over the world, reducing the chances of services being compromised.

Tradability: Thanks to DeFi, the tokenization of assets is now possible. Tokenization means one can quickly sell an asset that was previously illiquid (not fast-moving), as well as divide an asset into parts that enable many market participants to buy just the portion they can afford, instead of losing out on a whole investment.

Accessibility. The world’s unbanked can access financial services that they previously couldn’t, thanks to DeFi. 

What Are The Use Cases For DeFi? 

The following are some of the potential use cases for DeFi: 

i. Payments

DeFi platforms or applications can be used to create blockchain-based protocols that allow individuals to have wallets via which they can make instant and cheaper payments. 

ii. Borrowing and Lending

DeFi enables open lending structures that have numerous advantages over the traditional borrowing and lending system, including: 

  • Ultrafast transaction settlements 
  • Ability to back up digital assets with real-life assets 
  • Credit checks are not necessary; hence more people can get access to loans
  • Potential standardization and interoperability of financial services, making them frictionless across various providers 
  • Democratizes the borrowing and lending process by providing borrowers with a wider pool of potential lenders.    

iii. Stablecoins

A stablecoin is an asset that attempts to circumvent the price swings in cryptocurrencies, making them suitable as mediums of exchange and stores of value. Stable coins thus provide the stability associated with fiat currencies while maintaining the benefits of cryptocurrency such as security, fast processing speeds, and overall efficiency. 

iv. Tokenization

This is the process of digitizing a real-world asset to increase its liquidity in the marketplace. Tokenization creates asset-backed tokens – which are digital tokens backed by real-world assets. Through tokenization, assets that traditionally have low liquidity, e.g., jewelry, real estate, and art, can quickly move their position in the marketplace. Also, thanks to the ability to divide assets into portions through tokenization, non-high income earners can get a piece of a product or investment that they previously couldn’t afford.  

v. Decentralized Exchanges (DExes)

Decentralized exchanges are platforms where users can exchange digital assets without relying on a third party, as in a centralized exchange. Instead, trades occur between parties in a P2P, automated process. Examples of DExes include Binance DEX, Radar Relay, and EtherDelta. 

vi. Issuance Platforms

An issuance platform is a service that allows people to tokenize their assets by providing them with the tools to create digital tokens. An issuance platform provides the necessary technical and legal infrastructure to ensure a seamless tokenizing process for users.   

Thanks to these platforms, individuals and companies can raise funds without the costs associated with intermediaries such as banks, credit unions, lawyers, etc. They also open up investment opportunities for investors of all net worth levels, origin, or geographical location. 

vii. Open Marketplaces

With open marketplaces, DeFi reimagines the age-old idea of a marketplace by turning it into a decentralized platform where people can exchange things of value. 

People can buy and sell non-fungible tokens (ones that are unique and thus not interchangeable, as opposed to fungible tokens such as Bitcoins that are interchangeable) such as trading cards, collectibles, domain names, game items, and so on. All transactions take place via blockchain-based smart contracts, removing the need for a central authority who would normally dictate the rules of the marketplace.  

viii. Prediction Markets

A prediction market is a group of participants who speculate on the outcome of future events – from elections to games to weather to natural disasters to commodity prices to major political events. 

DeFi provides a decentralized take on traditional betting markets such as casinos. Decentralized prediction markets are censorship-resistant, thus democratizing the betting space. For instance, individuals can participate in betting on their favorite sports events even if they live in jurisdictions where betting is restricted. It also means that anyone can create a bet without the approval of a central authority like, for instance, the administrator of a betting platform.

ix. Decentralized Autonomous Organizations (DAOs)

These are organizations that allow individuals to create organizations whose rules and bylaws are encoded on the blockchain. DAOs represent the highest degree of organizational transparency, with every process automated and with minimal to no human input needed. They solve the problems of centralized, hierarchical setups such as corruption, arbitrary decision making, delayed decision making, and so on. 

Real-Life Applications of DeFi

The DeFi world is up and running with applications that are already making their impact felt. The following are some of the most popular DeFi use cases out there today:

☑️MakerDAO. This is a decentralized autonomous organization running atop Ethereum’s blockchain. It has a dual coin system that aims to mitigate the volatility of cryptocurrency. The MakerDao platform has two tokens: Maker – which is volatile and fluctuates like any other crypto and is used to govern the Maker platform, and DAI, a decentralized stablecoin whose value is fixed in a 1DAI = 1USD formula. Makercoin utilizes external market economics to allow DAI to be a stablecoin.  

☑️Dharma Protocol. This is a finance application based on the Ethereum blockchain that democratizes borrowing and lending. As a lending platform, Dharma has all the works of a traditional lending platform – except that it expands finance in that anyone, anywhere, can access the Dharma platform as long as they have an internet connection. 

☑️Uniswap. Uniswap is an Ethereum blockchain-based decentralized exchange that allows individuals to trade ether and ERC-20 tokens. Thanks to its decentralized protocol, there is no need for middlemen – which saves costs, and users have complete autonomy over their crypto holdings.

☑️Bloom. Also, Ethereum-based, Bloom is a credit scoring and identity verification platform that aims to reduce credit fees, increase credit access, make credit histories shareable across countries, and make credit risk assessment fairer. Through Bloom, individuals with little to no credit stand a better chance to get access to loans. 

☑️dYdX This is a DEx that allows traders to exchange cryptocurrency derivatives. Derivatives are financial instruments that derive value from an underlying asset, e.g., Bitcoin futures. Via dYdX, traders can exchange their crypto derivatives of choice in a censorship-free, peer-to-peer, and fairly priced environment. 

Final Thoughts

By creating a financial system that’s open to all, accessible, affordable, and transparent, DeFi promises to wrestle economic power from those at the top and give it back to the people. And it proposes a powerful use of blockchain technology – decentralized financial services ranging from lending to asset issuance, to open marketplaces, to prediction markets, to censorship-free crypto exchanges, and more.

Categories
Cryptocurrencies

Decentralized Financial Systems: What Are Their Benefits?

The current financial system is centralized. Currency is issued and regulated by governments or central banks. We also entrust our assets to finance firms so that we can get returns on savings. This translates to our financial systems being centralized. And therein lies the problem. Not only do centralized systems have a single point of failure, but they also comprise humans who are prone to making mistakes.

The current financial system is centralized. Currency is issued and regulated by governments or central banks. We also entrust our assets to finance firms so that we can get returns on savings. This translates to our financial systems being centralized. And therein lies the problem. Not only do centralized systems have a single point of failure, but they also comprise humans who are prone to making mistakes.

The current financial system is centralized. Currency is issued and regulated by governments or central banks. We also entrust our assets to finance firms so that we can get returns on savings. This translates to our financial systems being centralized. And therein lies the problem. Not only do centralized systems have a single point of failure, but they also comprise humans who are prone to making mistakes.

It also means many people are excluded from the financial system. For example, to qualify for a loan, one must have a bank account and a good credit score. And to have a bank account, a person must comply with the bank’s KYC procedures. For someone who doesn’t have the necessary KYC documents, it’s impossible to open a bank account and hence get access to banking services such as a credit card, savings account, loans, etc. 

In a centralized system, there is too much power in the hands of institutions, while a big chunk of people is excluded from financial services that would allow them to engage in activities of economic value. Also, entrusting our money in centralized financial institutions means we have very little say in how it is invested and handled – meaning there is no transparency.

So what can we do to solve the centralization problem? The solution is decentralized finance. Decentralized finance is an idea that has caught on, especially in the last couple of years. Crypto ‘purists’ are mainly responsible for pushing the concept into the fore, as they strive to accomplish ‘’Satoshi’s vision.” Bitcoin’s founder – Satoshi, had this as the very first line in the Bitcoin white paper: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

In this article, we deconstruct decentralized finance, its inherent features, its defining principles, and the benefits that it could herald for the finance world. 

What is Decentralized Finance?

When we take away all the buzz, “decentralized finance” comes down to mean financial access for all, without the middlemen. It’s the idea of handing economic power back to the people.

It’s another application of blockchain technology that aims to expand financial services to more people. Decentralized finance includes digital assets, smart contracts, protocols, and decentralized applications built on public blockchains. After all, blockchains such as Ethereum and Bitcoin are more than the driving technology of cryptocurrencies. They are open sources whose concept could change how the world economy works. 

The decentralized financial system movement has three core principles:

☑️Interoperability and Open Source – this means decentralized finance projects should be woven together on a technical level to strengthen their effects as a whole

☑️Accessibility and Financial Inclusion – this means the end goal is to have a financial system that’s accessible to at least everyone with internet connectivity, no matter their geographical location

☑️Financial transparency – this means that the market level of information of services is transparent to all participants while still preserving their privacy

Decentralized finance has six defining characteristics that set it apart from the private networks used by the traditional financial system:

  • Permissionless – this means anyone can connect to the network regardless of their social status or location
  • Decentralized – there is no central authority overseeing transactions. Records are kept simultaneously across numerous computers across the world
  • Trustless –  there is no need for a central authority to validate transactions as they are automatically validated
  • Transparent – all transactions are publicly available and auditable
  • Censorship resistant – interference by a central authority is not possible
  • Programmable – developers can code business logic into affordable financial services

Pros of a Decentralized Financial System

A decentralized financial system has a whole host of benefits that could change not only how we interact with money, but also improve the very premise that it originated from – namely cryptocurrency. The following are the advantages of decentralized finance:

Expanded financial access

With decentralized finance, anyone with a smartphone and internet connection has access to financial services. Currently, several barriers prevent a section of the world’s population from accessing financial services:

  • Status – lack of citizenship, identifying information, etc.
  • Wealth – high fees required to sign up for access to financial services
  • Location – long distances from financial service providers

A decentralized financial system equalizes finance such that a top financial trader at a global firm has the same access to financial services as a storekeeper in a remote area of Kazakhstan

Affordable Cross Border Payments

A decentralized financial system removes the need for costly intermediaries, making sending money to loved ones overseas more affordable.

In the current remittance system, there are too many intermediaries involved, making cross border payments too expensive. The current global remittance fee is roughly 7%. In a decentralized financial system, remittance fees could well be below 3%.

Improved Privacy and Security

In decentralized finance, individuals have full control and custody of their wealth. There are no intrusive KYC procedures, and transactions can take place without validation from a third party. This is unlike the current system where users’ wealth and personal information are stored in institutions where it is at risk.

Censorship-resistant

Decentralized finance has censorship-resistant financial products. Transactions are in unchangeable records, and the network cannot be shut off by governments or central banks at a whim. The decentralized finance system is entirely independent of existing legal or regulatory structures.

Simple to Use

A decentralized financial system would feature plug and play applications free of any complexity.

For example, a user in Morocco could receive a loan from India, invest in a business in the US, pay off their debt, etc., – all through interoperable applications.

Improving the Crypto Ecosystem

Decentralized finance solves several problems in the crypto ecosystem. Unlike many cryptocurrencies that grapple with scalability problems, decentralized finance payment products are helping in making micropayments fast, low-cost, and convenient. For example, decentralized exchanges are helping drive liquidity for the crypto market.

Driving Innovation

Decentralized finance helps to drive innovation. People can create financial products whose rules will be coded in a smart contract, and offer them to the world. This leads to not only diversified financial products suitable for different financial needs but also more improved ones as developers compete to unleash the next superior product.

New Forms of Value

Decentralized finance products also contribute to the crypto ecosystem by creating new forms of value and expanding the original idea of cryptocurrencies. Thus, a decentralized financial system helps the crypto ecosystem expand and diversify – all for the benefit of users.

Conclusion

Decentralized finance is an exciting idea and one that could finally equalize financial services. What the internet has done for information could be what decentralized finance does for the global financial system. With rapid developments like digital assets, smart contracts, decentralized exchanges, etc., Satoshi’s vision may very well be an idea whose time has come.

Categories
Cryptocurrencies

The downside of centralized systems

In today’s finance, governments and central banks pretty much control the whole system – from the issuance of currency to setting of interest rates, while big players like regulators, corporations, and international organizations wield so much power over the system. As such, the current global financial order is centralized – with influence and power belonging at the top.

In today’s finance, governments and central banks pretty much control the whole system – from the issuance of currency to setting of interest rates, while big players like regulators, corporations, and international organizations wield so much power over the system. As such, the current global financial order is centralized – with influence and power belonging at the top.

In today’s finance, governments and central banks pretty much control the whole system – from the issuance of currency to setting of interest rates, while big players like regulators, corporations, and international organizations wield so much power over the system. As such, the current global financial order is centralized – with influence and power belonging at the top.

We have worked with centralization since the very invention of banking. That doesn’t mean it is the ideal system – far from it. A centralized system has its own challenges – some of which have contributed to the global problems we face today.

In this article, we break down the cons of centralized finance and what that means for the average person. But first, what exactly is a centralized finance system?

Defining Centralized Finance

Centralized finance, which characterizes today’s global financial system, concentrates authority, control, and decision making at the hands of the top few. Just like other sectors that employ a centralized approach, centralized finance features the following characteristics:

☑️ A clear chain of command – everyone interacting with the system – from employees to consumers, to intermediaries, etc., knows who to turn to for any major decision making.

☑️ Standard operating procedures – financial institutions follow specific standard procedures and methods. As all decisions lie with the managing body, there is little variation between departments and branches.

☑️ Bureaucracy – owing to the central chain of command, the more a financial institution grows, the more the layers of management and hoops that have to be jumped before reaching the front lines

Cons of Centralized Finance

Having all the decision making power and control at the top financial institutions means the entire system has to grapple with these risks and drawbacks:

Billions of People Are Unbanked

In the current centralized system, having a bank account is a prerequisite to accessing financial services. However, over 1.7 billion worldwide do not have a bank account, either due to banks being too far away, not having enough money to open an account or lack of necessary documentation or credentials.

 As a result, these people cannot access financial services to enable them to create economic value and improve their standards of living. As the high-economy countries run the global financial system, these people are left behind.

A Centralized System Favors the Financially Literate

To utilize financial services and participate in financial markets, one must have a degree of financial literacy. But currently, only one in three people have an understanding of basic financial concepts, with a majority living in high-income economies. A centralized financial system favors the financially literate while leaving behind the illiterate and semi-illiterate.

Without a basic understanding of financial concepts, it makes it hard for the bigger part of the population to make the right financial decisions and hence create wealth.

Global Inequality

In the centralized financial system, financial markets are usually dominated by those with the best connections to them. These people have access to financial opportunities and asset classes, capital, unhindered access to market information, and access to financial expertise. As a result, wealth is distributed in a top-heavy manner, i.e., the majority of global wealth is concentrated among very few people.

On the other side of the spectrum, the overwhelming majority of people have no access to information or even capital that can help them start building wealth. They may not only be living from hand to mouth, but they may also lack access to investment tools like stocks, bonds, mutual funds, etc.

High Intermediary Fees and Slow Transactions

Centralized finance tends to involve high intermediary fees while sending money across borders. The average cost for sending money overseas is 7% of the total value, and that rises to almost 11% when sending money via a bank.

Even worse, international bank transfers can take several days, leaving many people who are waiting for cash stranded. 

Low Trust in the Financial System

Due to the lack of transparency associated with centralized finance systems, many consumers have little or no trust for the model. A report by Edelman shows there is only a 57% level of confidence in the financial sector, with trust in governments – which regulate the financial industry, even lower. Many people report feeling they are not being served in acceptable standards.  

Currency Manipulation and Censorship

In a centralized financial system, governments have the power to manipulate fiat currencies. Venezuela and Zimbabwe are two examples of how governments have devalued currencies, causing runaway hyperinflation and a devastating effect of citizens. For instance, currency manipulation in Venezuela caused the price of a cup of coffee to skyrocket by over 772,400% in six months.

Centralized power also means governments and banks can financially censor citizens by freezing their accounts, assets, denying them access to payment systems, emptying their accounts, denying them access to their funds, etc. In short, a centralized system takes away the financial power of citizens.

Systemic Risk

With financial power held by just a few elite institutions, it means one abject failure can send the whole system crashing. This is illustrated only too well by 2008’s US’ subprime mortgages that threw a wrench into banks’ balance sheets, causing a massive downturn that created a ripple economic effect worldwide.

Centralization creates an “all eggs in one basket” scenario, and if that basket breaks, it can spell doom for the world’s wealth on a massive, destructive scale.

Extractive of Value Rather Than Adding Of Value

There are two types of economic activities: those that add value and those that extract value. In today’s centralized financial system, too much economic activity is intended to extract value from other parts of the economy, rather than adding value. To put it another way, much of today’s economic activity is geared at making a profit at the expense of other people and industries.

This state of affairs stifles innovation and advancements that could lead to a better financial system for the betterment of all, as everyone rushes to gain more value while contributing little to nothing in the system.

Complexity

In the centralized financial system, there is too much complexity of terms, concepts, and financial instruments, which increases instability or amplifies shocks in the system. For instance, the average person on the street cannot start to fathom complicated things like CDO-Squared or Commercial Mortgaged-Backed Securities. These complex financial instruments transfer the risks in the finance sector to other countries and industries, with negative consequences for the entire system.

Is There An Alternative?

With such drawbacks for the centralized financial system, is there an alternative? The answer is yes. The proliferation of mobile phones, internet connectivity, and the development of groundbreaking technologies such as blockchain could create never before seen opportunities for a decentralized, accessible-to-all financial system.

This evolution, however, depends on the attitude of governments and the existing financial system.  Its willingness, or lack of it thereof, to embrace decentralized financial solutions will very much determine the future of the global financial system.