Despite the fact that Bitcoin has been lately grounded ever since 2017, losing almost 75% of its value in the last 3 years, the market for cryptocurrency is not going to burn out anytime sooner. Perhaps, the crypto community should pledge their allegiance to DeFi or Decentralized Financing that has popped out like a savior for this market and beyond. It is not going to be like its predecessor Etherum & Bitcoin that was segmented and ended up fascinating a niche audience, rather it will be a holistic thing for envisaging greater community participation.
To explain this statement, you need to look at the market cap of Bitcoin in 13 years, which is $120 billion or one-thousandth the size of the world economy, pegged at $120 trillion. Juxtapose the same with the DeFi market cap in just over a year’s time, starting from $4, $317 million, $680 million to $7.88 billion. The figure might look marginal like roughly 10% in a year’s time but pandemic or recession makes it majestic. A normal market could have easily seen a 4x increase considering Synthetix and Compound that started exploding ever since their launch with 20x to 200x returns, which is simply crazy.
Why is DeFi Exploding?
“Problem for one is an opportunity for the other” with that being said, DeFi has been built upon the problems that centralized financing failed to solve in over 500 years ever since the first currency was printed. The complexities of stricter regulations, processes, and compliances make it hard for roughly 1 billion people to access into the banking system and use banking services because of stringent KYC procedures, loan approval parameters, and documentation to avail basic facilities like a credit card, foreign currency exchange, Demat account, and online payments. DeFi simplifies financing with lesser complexities and no formalities to get into the financial system. You just need the Internet and phone to get inside the decentralized financing and access its multiple benefits in the form of Yield Farming, liquidity, financing & loans, and payments.
How Can You Invest in the DeFi Market?
It is one of the best practices that you can use to make instant money from the DeFi market. In a typical lending process of the DeFi market, the users get a chance to borrow one asset in exchange for the other. Since DeFi has been built on the Ethereum network, at present, the collaterals that are used are usually Ether. The accruing interest method must be paid up along with the principal amount. The lender has the provision to impose a penalty and liquidate the assets of the borrowers if the market value of the collateral falls below the 150% collateralization ratio. At such times, the lender can sell these collateralized assets to someone else seeking instant funds. This is the protocols of Maker’s DAO tokens in the DeFi market.
One of the competitors of DAO, EOS has somewhat different protocols where the lenders can stake or inject funds in the liquidity pool to add liquidity in the market and take funds by collateralizing different assets for the liquidity, they too have to pay in Ether. Generally, in the EOS protocol, backed EOSDT tokens seek for 130% collateralization, which is lower than any other DeFi products in the market.
This is yet another DeFi option to explore in the DeFi market where you can choose from a range of derivatives like asset-backed tokens to issue other assets for interest gains. For example, Synthetix allows the creation of Synths, an asset created based on currencies, commodities, and crypto-assets. In these protocols, new Synth tokens can be used to raise more funds but often for printing the Synths, a 75% collateralization is necessary. Similarly, it is possible to create and issue insurance coverage on the network of derivatives funded by the community. Augur has set-up a protocol that allows users to create a market for any event and bet on the same to earn interest from there.
There is a provision to offer sets of tokens or tokens backed by tokens or other forms of asset management. In these protocols, two assets are jointly backed and injected in the liquidity pool, and consumers can speculate the market and buy tokens similar to shares in a traditional CeFi market using trend trading, range-bound, buy & hold protocols. For example, if you are doing a trend trading in the set in USDC & Ether, it can be either on USDC or Ethereum to analyze the fluctuations in a 20 day moving average. Sounds, a little complex, isn’t it? Let’s explain to you through an example, generally, in trend trading, you can set up any strategies based on a consensus mechanism backed by smart-contracts to streamline trading. So, if you have entered the set with Eth & USDT, the set will help you enter the market with Eth backed by USDT (US$T). There are provisions where you can either keep the set with two currencies or a single one. In this set, we are taking USDT as the base of the set. Meaning, all fluctuations will be computed on price range fluctuations in USDT. The benefit of this system is 20-day average always stabilizes the tokens based on the stable currency used as the base to backup for the losses. So, you always end up on a profitable note in the market.
Paymemts are also one of the key areas of DeFi that has seen an exponential rise by introducing the provision for micro-payments. Many investors/community members have been working upon introducing the smart ways that can make micro-payments possible bypassing the gas. XDai has already worked on this sphere by eliminating the longer block-time to just 5 seconds and completely eliminating the gas from the system. In the Proof of Autonomy consensus algorithm, there are specific endorsers that could be public notaries backing the system with stakes to work as a DAO or Decentralized Autonomous Organization proposed. It is in the ratio of 1:1 and performs the same role as Eth does in its network.
Connext is also another off-chain system that simplifies micro-payments and investors can back such projects in the DeFi market to earn healthy lucrative returns in a 50:50 liquidity pool using the (POA) consensus algorithm. The purpose of the staking is to safeguard the system against unethical hacks where the endorsers’ money will be liquidated to pay off for the fraud. The endorsers generally get a fee which is very little in comparison to the gas to support the projects. The success of the project raises the value of the tokens, as in case of Connext & XDAI Chain.
Future of the DeFi Market
With the vision to bank the unbanked with better incentivization, DeFi is well ahead of the adoption curve and with new innovations coming along the way, there is no doubt that this market will be another Bitcoin Euphoria in the making that started with 4$ in August 2017 to over $680 million in 2019 and roughly it has the total market cap of $7.8 billion at present.