Decentralized finance or DeFi hit an astonishing new height of $4 billion.
DeFi is growing insanely fast, as institutional capital makes slow but sure inroads into the digital asset field.
DeFi is creating technologies where people are able to code their own transactional currencies in the form of tokens or cryptocurrencies. Just like anyone can have their own YouTube channel, DeFi allows the same for decentralized finance.
The DeFi industry would benefit by incorporating certain aspects of the old financial world into its business model and create new types of economies and encourage more people to use DeFi.
DeFi and stablecoins
The most promising DeFi apps today include protocols for decentralized interest rates, liquidity pools, stablecoins, and others.
DeFi platforms offer solutions where you can earn 3%–4% on liquidity turned crypto deposits and it’s why big banks are threatened by it but keen on launching their own stablecoins and distributed ledger (blockchain) infrastructures.
DeFi would not exist without stablecoins. A stablecoin is pegged to a fiat currency such as the USD, or the Chinese Yuan. Most DeFi contracts incorporate stablecoins at the core of their functionality to counter cryptocurrency volatility. Common types of stablecoins in the market today include USDT, USDC, TrueUSD, Dai, and Paxos.
The total value locked in DeFi contracts is approximately $8 billion.
1. Borrowing and Lending
DeFi allows a user to programmatically take out a loan, without an application review or even a bank account. In some DeFi applications, the borrower does not need to go out and find a lender. Instead, the lender is the smart contract itself and interest rates are calculated algorithmically based on supply and demand. In other applications, a fixed interest rate is guaranteed in exchange for loaning your coins to the contract.
DeFi allows borrowers to stake their digital assets as collateral, which are locked within a smart contract until the loan is repaid. Examples of DeFi lending platforms include Compound, Aave, Maker.
2. Decentralized Exchanges
Trading of securities and cryptocurrencies is typically done through platforms run by a third party. DeFi exchanges eliminate middlemen and can act as a custodian of funds and digital assets in a peer-to-peer exchange.
Examples of decentralized exchanges include Curve, Uniswap, Bancor, Kyber, and Synthetix.
3. Asset Management Protocols
A recent category of DeFi products creates frameworks for users to pool funds for investments similar to Robo advisors, automated funds, and asset aggregators.
Examples include Melon, Set protocol, Zapper.fi, and Insta.dapp.
4. Decentralized Prediction Markets, Options, and Insurance
This next category is all about decentralized prediction markets, options, and insurance, in a fully automated matter.
Examples include Augur, Polymarket, Opyn, and Nexus Mutual.
5. Tokenizing cryptos
This is a really popular one! Assets like Bitcoin may be great for certain functionalities such as a store of value but are difficult to use as collateral. Creating a digital representation or right to Bitcoin allows it to be used in financial contracts. These platforms are becoming so popular that Bitcoin is currently being tokenized faster than it is being mined.
Current platforms acting as synthetic bridges include BitGo ($386 million in tokenized BTC) and REN ($200 mn in tokenized BTC). A wrapped token is an ERC-20 token with a value identical to another asset that it represents, either through a smart contract or by being backed one-to-one with the underlying asset.
6. Smart contracts
DeFi also promises to combine different smart contracts with ease. For example, you could invest $100,000 at 5% interest, and then automatically reinvest that interest into another asset through a DeFi Robo-advisor, or use it as collateral for a loan.
UAE’s DeFi- Crypto Price Index
In the United Arab Emirates (UAE), the Crypto Price Index (CPI) is offering its native CPIX token ecosystem, where users can gain broad exposure to the cryptocurrency industry as a whole. It does not require any specific knowledge of different projects, which can certainly be appealing to casual onlookers.
In the financial world, traditional stock markets like the S&P500, the Dow Jones Industrial Average, or the Nikkei 225 provide broad exposure to any specific industry. In the cryptocurrency world, the concept is relatively novel.
The Crypto Price Index is not just tracking the top 10 or 20 of crypto assets ranked by market cap. Instead, it is designed to offer token holders a massively diversified range of assets spanning the different segments of the cryptocurrency industry allowing token holders to always have access to emerging trends and projects.
To engage with the CPI, interested parties will need to obtain the CPI token (CPIX) which presents a stake in the overall Crypto price Index ecosystem.
Users can customize the basket of currencies they want to be exposed to. For example, a CPI30 token will expose traders to 30 different cryptocurrencies.
CPIX tokens will be minted and backed by component assets maintained in an escrow smart contract. Obtaining CPIX tokens occurs by depositing cryptocurrencies. Redeeming tokens happens in the opposite manner: depositing CPIX to the smart contracts will ensure traders receive their original asset back.