DeFi- An Explanation
Cryptocurrencies are evolving as the digital currencies and money market is ever-shifting with new hopes to attain blockchain’s decentralized finance (defi) in the true sense.
Recently, countries are pushing forward for the Central Bank Digital Currencies CBDC but cryonauts are experimenting with the next money market with DeFi protocol. Antlia chain team is developing cross chain scalable blockchain for next generation decentralization to overcome challenges of blockchain.
DeFi- A cryptocurrency revolution?
Cryptonauts are calling DeFi the cryptocurrency 2.0. The DeFi ecosystem is rampaging with hundreds of projects launching with more than $14.32 billion in assets till the third week of November 2020 as reported by DeFi Pulse. Last year, the statistics were just over 276 million as reported by DeFi Pulse. But what exactly is DeFi?
Coming to the formal definition of DeFi, it is an abbreviation of much circulated phrase “Decentralized finance” that acts as an umbrella for the financial technologies such as digital assets, network of integrated protocols & smart contracts, and a vast amount of the decentralized functions and decentralized applications (DApps). Something more exciting about decentralized finance (DeFi) is the fact that it is not merely just some cryptocurrencies people are trying to buy to make quick bucks. Instead, it is shifting the financial paradigm by integrating the traditional finance functions such as lending to serve real businesses with the introduction of yearly interests.
During these uncertain times, the adoption rate of innovative digital banking solutions is increasing rapidly.
The current economic vulnerabilities exposed by the global pandemic have opened gateways for innovative solutions. These solutions might include:
- Decentralised Lending platforms for borrowing and lending cryptocurrencies. Examples include Compound, Curve and Aave
- DEX platforms like Kyber and DEX aggregators like 1icnh
- Liquidity Pool Provider Applications like Bancor and Uniswap
- Decentralized Prediction Market like Augur
Why decentralized Finance (DeFi)?
DeFi has gained this big boom because of the introduction of the existing financial functions like lending, earning interest and liquidity provision. Alex Pack, the managing director has emphasized the importance of DeFi in blockchain by considering it an instrument capable of reconstructing the existing banking system architecture in a permission less way. Financial applications in blockchain till now highly relied on gaining the cryptocurrencies and then earning profit on it depending on the price fluctuations. Now, with DeFi, a user can keep his fiat money while gaining the cryptocurrency token on which he/she will gain the interest. This removes the risk factor thus allowing more people to join the DeFi market.
1. DeFi Lending/ Staking DeFi Platforms
DeFi Lending/ Staking platforms one of the first innovative DeFi platforms that have burst into the market. These DeFi lending protocols help the users to earn interest (APY/APR) on the set of stable coins. To understand the process better,let’s start with a rather famous DeFi Lending platforms i.e. Compound and MakerDao
- Compound: Compound is basically an organization of publically accessible smart contracts on Ethereum that allows the borrowers to borrow loans and lenders to provide loans by sealing their assets into the smart contract for an amount for time. Like in traditional settings, the interest rates earned by the lenders depend on the performance of the cryptocurrency that has been lended. The performance depends on the supply and demand of that particular cryptocurrency. With every block mined for that cryptocurrency, interest rate changes. Once the loan is paid back, the locked assets are released. Compound native token also known as cToken allows the user to gain interest on the money they deposited while it is being traded or transferred in other linked lending applications.
- MakerDao: This blockchain based decentralized finance platform lets borrowers use volatile cryptocurrency as collateral for loans of stablecoins (called dai) pegged to the U.S. dollar. The borrower pays interest on the loans, but if the crypto collateral falls too far, it’s sold to pay off the loan. MakerDao offers an exceptional solution to the volatility of the cryptocurrency by offering them in exchange for the stable coin known as Dai pegged with the U.S dollars. A user can deposit or send ether in the Maker’s smart contract. This creates CDP or Collateralized Debt Position (CDP). For every ethereum deposited, a certain amount of DAI is released depending on the collateralization rate. If the price of ETH drops, the CDP is closed meaning it will stop you from taking out more DAI to ensure that enough capital is locked against the amount that has been taken out. To get back your ether, pay back the amount and some additional fee.
2. DeFi Aggregator and Yield Farming
To understand what DeFi aggregator is, it is extremely important to understand the concept of yield farming. The last wave of DeFi focused on developing solutions that could imitate lending in trading banking. Result was a huge number of crypto exchanges, with numbers skyrocketing as high as 300(only registered) popping everyday as quoted by CoinGecko. The current DeFi ecosystem is working to build applications trying to find best interest yields from different lending platforms. These interests are generated by the Yield Farming, a technique that moves the crypto assets across multiple platforms to generate most returns possible by trailing the liquidity pools to generate high interests.
Yield Farming automates the process of decisions made during on-chain investment using smart contracts. These smart contracts employ APIs to find the best DeFi rates such as APY/APR and use that information to transfer the coins. Yield Farming platform initiates profit switching for lending providers, moving the customer’s funds between dydx, Aave, and Compound autonomously.
With the evolution of DeFi, aggregators are being introduced in the market to maximize the benefits from multiple lending platforms by producing the highest yield possible.
3. Decentralized Exchange
As already mentioned, DeFi is finding its way to multiple applications; one of the most prominent being exchanges. With the boom in DeFi, decentralized exchanges have gained much more traffic in 2020. According to the Dapp Radar, the trading volume on the Dex for the last 30 days had been high upto $753,744,159 with 27,776 unique traders across multiple platforms. Before, the decentralized exchanges were a huge wave with the capability of on-chain settlement via smart contracts. This avoided single point of failure but token swapping for ethereum was still a 2–3 steps process with Token A swapping with ETH and ETH for Token B. Though this happens in the backend, it costs double trading fees. Infact according to Bitcoin.com, one of the top 6 DeFi platforms is a Decentralized Exchange by the name of Curve Finance.
To understand the basic features of existing decentralized exchanges, let us go through the table comparing them to centralized exchanges.
There are two types of DEXs in the decentralized exchanges:
Antlia, an upcoming DeFi ecosystem, is solving the problem of liquidity and trade volume with the introduction of the liquidity pools.
a. Liquidity Pools
Liquidity Pools will be the trading venue for the pairs of specified tokens. A pool contract will be created specifying the balances of every token. It will act as an automated market maker having code facilities of buy and sell orders having a set of predefined parameters.
Challenges with DeFi
1. Low Fiat Liquidity and Swapping
In the current DeFi ecosystem, the liquidity has increased ten folds due to the introduction of liquidity pools in the DEXs and the lending aggregators. However, the fiat backed asset swapping is still limited, contributing to the lower liquidity.
2. Poor performance
The slower speed of the existing blockchains translates to the applications built on top of them. An ecosystem improving the speed, scalability and performance is required that incorporate the solutions for high performance.
3. Cluttered ecosystem
With the introductions of the newer DeFi applications, the ecosystem has clustered with the similar applications lacking innovation. The challenge is to build applications that fit into the broader DeFi ecosystem.
4. Cross Chain Assets pairs and Swaps
The existing DeFi token swapping solutions suffer from major issues due to the high dependency on the centralized solutions like exchanges, wallets and other third party providers. A system independent of such solutions and enabling swapping on its own by managing the state of the swaps, liquidity and the balances of the network is much needed
Antlia is an Interoperable and scalable blockchain with trusted smart contract based oracles for seamless data and asset sharing. Antlia’s DeFi ecosystem, with its asset (fiat and cryptocurrency) sharing capabilities in addition to the interest generating applications has an ability to shift the financial paradigm.