It’s all about DeFi
What is decentralized finance? Good question. At the dawn of the industry’s appearance, it was referred to as “open finance”. Now, this term has become fairly outdated, giving way to “DeFi” as a new name.
DeFi is a space that enables users to do anything with money within a digital ecosystem, and the only instrument needed to do that is a digital wallet.
DeFi opens up millions of opportunities. It opens finance and closes personalities. In a fiat-currency real world, any e-purchase goes along with at least basic personal information being disclosed such as ID, account details and so on. DeFi, on the other hand, allows users to borrow money without even mentioning their names.
Those who want to try to touch DeFi can do so by having a digital wallet with a balance of at least 10–20$-worth of crypto. It can be used to buy utility tokens like FUN (a token for gaming ecosystems). Or it can be spent within MakerDAO to yield DAI stablecoins (that are believed to reach $1), or to borrow cryptocurrency within the Compound protocol. The main thing is not to forget to play with as much money as is affordable to lose, and with DeFi, it is two times more applicable. DeFi is only gaining momentum, and many unexpected things may happen.
As young and unproven as it is, the industry has phenomenal potential, and it’s already showing.
There’s no trust issue with Dapps as they require you to put collateral to guarantee your debt, and usually, this collateral is two times higher than the debt itself.
Of course, the fiat put into the DeFi marketplace can be returned by switching them back from crypto to real money. But the game may be worth the candle. The first steps in getting to know DeFi may include trying to open a deal and close it in a few minutes, which is totally acceptable. Of course, there might be some insignificant transaction fees charged, or the expenses of using Ethereum, which are growing at the moment, but the step will be made, and it definitely won’t make a newbie broke.
One may ask, what’s the use in borrowing assets for someone who has money at disposal? The first and foremost reason is to use the assets in market speculations. The most popular trading activity using borrowed assets is shortening (meaning taking gains when the price for a certain asset falls). Borrowed assets are widely used by long-term holders who just want to trade occasionally to feel the market.
Proof of Stake (POS)
Proof of stake is a mechanism when a blockchain network comes to a consensus. With POS, a user can mine and confirm each subsequent block in accordance with the number of coins they hold. The mining power of each miner is determined by how many Bitcoin or any other cryptocurrency they hold in their possession.
- By a POS block generation system, Bitcoin miners can generate and confirm blocks on the basis of how many Bitcoin they have.
- There are two widely used types of a consensus mechanism — Proof of Stake (POS) and Proof of Work (POW). The latter is an original one for blockchain networks, and the first was created as an alternative.
- POW is a consensus algorithm where miners have to prove how much computing power has been spent to complete transactions. It is energy-consuming with significant amounts of effort required to generate new blocks to the chain.
- POS is considered to be more secure from hacker attacks to the network as the rewarding system is built in such a way that attacks don’t seem to be more profitable than actual mining.
POS in action
POS emerged as a substitution to POW after significant drawbacks of the latter had been discovered. When someone makes a transaction within POW, the transaction information is entered into the block at the biggest capacity and further copied to all network nodes. These nodes are a backbone of the blockchain network that confirm transaction validity across the network blocks. Transaction verification takes nodes to resolve a range of computing challenges, and the first node to do that gets a reward in the form of cryptocurrency. Each verified block is then added to a chain that represents a public ledger with information on transactions available to all.
POW is a highly energy-consuming mechanism. It requires tons of electricity and a hash rate to support a mining process. The operational costs of POW mining are high and usually covered with the reward coins that are sold for fiat to pay the bills.
POS was created to tackle this problem by dividing the mining power in accordance with the coins owned by miners. Therefore, miners are able to verify as many transactions as provided by the stake of their ownerships. POS allows to economize on energy resources and sets certain limits to the mining activity.
What is yield farming?
Yield farming is a relatively new technology that is still in need of battle-testing. It is an opportunity for crypto holders to earn additional coins by receiving a return on their cryptocurrency via decentralized lending technologies based on smart contracts, like Compound.
In other words, yield farming allows users to lend and borrow cryptocurrency and make a profit on these funds. Most notably, borrowers are also in a position to earn a gain on their lenders’ debts.
In yield farming, traders can earn additional coins on possessed ones by lending them on various DeFi platforms, or money markets, like Compound, Maker, etc., that usually offer attractive yield rates either as a percentage of the provided amount or in the form of fixed interest. By moving assets to these platforms, traders accelerate their utility and liquidity.