Decentralized services (DeFi) are network projects based on the equality of their participants. DeFi performs the same functions as traditional financial institutions (banks, transfer systems, exchanges, and credit centers). But each member of the community simultaneously acts as an entity, processing other clients’ transactions.
Who invented it?
DeFee’s history began in 2009. Developed by Satoshi Nakamoto, the Bitcoin network allowed users to transfer money for the first time without the involvement of financial institutions. After the creation of the Ethereum blockchain and the introduction of smart contracts, it became possible to apply the distributed ledger in related fields.
In 2017, the MakerDAO project, the first decentralized credit service, was launched under the leadership of Danish programmer Rune Christensen. A few months later, EtherDelta appeared. This exchange functioned on the principle of a distributed order book. It allowed for the free exchange of tokens of ERC-20 standards between each other. You could also use a USDC wallet for convenience.
How it works
DeFi’s finances are managed by equal members of the community. The principle of distributed platforms can be understood through the example of MakerDAO and other lending services:
- Investors invest money, receiving MKRs in return, tokens that allow them to participate in the management of the project.
- The borrower gives the platform ETH as collateral. In return, he receives an equivalent number of DAI Stable Coins. The price of the coin is equated to the U.S. dollar and tends to have a 1:1 exchange rate.
- As soon as the borrower pays back the loan, he gets his ether back. The DAI tokens are withdrawn from the site and burned.
- The fees paid by borrowers for using the loan money are distributed to investors.
Why is it needed?
As of 2021, DeFi projects have had practical applications in areas such as:
- Banking (cryptocurrency loans and deposits). One successful example is MakerDAO.
- exchange activities. Exchanges based on the principle of distributed control are called DEX. The Uniswap protocol can be cited as an example.
- Tokenized stock trading The Injective Protocol is an example of technology.
- Prediction Markets The tool allows you to fix the terms of any deal between the parties, including betting bets.
DeFi and Ethereum
The first decentralized protocols were created on the Ethereum blockchain. This platform started implementing smart contracts in the settlement sphere. In July 2021, 7 of the 10 largest blockchain-based decentralized protocols by blockchain volume were running on the Ethereum blockchain.
The benefits of working
The main advantage of decentralized networks is the freedom and independence of users. Clients of exchanges do not risk losing money due to arbitrary administration, and borrowers know that their loan application will be approved automatically.
How to earn from decentralized assets
The ways to earn an income are constantly expanding. The most common opportunities for earning from decentralized assets are:
- Yield farming. Investors earn profits by contributing tokens to liquidity pools. As a reward, users are given tokens, which can be exchanged for other cryptocurrencies using the trastra wallet.
- P2P lending The owner of the coins can transfer them to other users at a predetermined interest rate. The repayment of the loan is secured by a pledge, which is blocked by the site.
- investing in native platform tokens. DeFi coins may be actively growing in value amid rising interest in distributed protocols.
DeFi is about decentralized finance. With the protocols, users transact directly, without the intermediary of exchanges and brokers.