Defi or Decentralized Finance is a peer-to-peer financial system based primarily on Ethereum. Built on automated Smart contracts that allow users to control assets 24/7, 365 days a year, Defi has instigated a revolution. It reimagines financial transactions by using blockchain technology to remove intermediaries. Since its creation in 2018, Defi has gone through radical changes and presented remarkable business opportunities. Let us look at what new it has to offer us.
A Crypto bridge is a tool that allows you to port assets from one blockchain to another. As the blockchain space expanded, each blockchain had its rules, tokens and smart contracts. Crypto bridges solve the lack of interoperability, a pain point in the blockchain. It powers the transfer of assets and data, allowing users to access new chains and DApps.
The most common use case of a bridge is token transfer. When you bridge one bitcoin (BTC) to an Ethereum wallet, a crypto bridge contract will lock your BTC and create an equivalent Wrapped BTC (WBTC). This WBTC is an ERC20 token compatible with the Ethereum network. The WBTC is a tokenized version of another crypto that holds the value of the asset it represents. It is redeemable (unwrapped) at any point. Crypto bridges are classified based on their functions, mechanisms and level of centralization.
Based on functions
Wrapped asset bridges enable crypto interoperability by porting BTC to Wrapped BTC. Sidechain bridges connect the parent blockchain to its child blockchain. This is needed when the parent and the sidechain have different consensus mechanisms.
Based on mechanisms
A unidirectional bridge means users can only bridge assets to one destination blockchain but not the other way. A bidirectional bridge allows bridging in both ways.
Based on the level of centralization
Custodial bridges require users to trust a central party for custody and transactions. Non-custodial or trustless bridges operate using smart contracts and trading algorithms that do not require users to trust a central entity.
Self-repaying loans are an exciting feature to be developed yet. Imagine a world where loans don’t have interest and use the yield on a deposit to pay for your loan. A loan whose value only goes down and never liquidates your collateral. To take out a self-repaying loan, you first deposit capital into a protocol like Alchemix. Alchemix is a protocol similar to MakerDAO, allowing you to borrow up to 50% of your deposit instantly. This is possible because of the high yields found in crypto lending. The 50% deposit in the protocol pays back the 50% taken as a loan.
Let’s say a user holds DAI, a stablecoin, in their MetaMask wallet. The user connects their MetaMask wallet to Alchemix and deposits the DAI. The DAI goes into the “Vault” and immediately starts earning interest. After fund deposition, you can instantly borrow up to 50% of the value deposited as ‘alUSD’, another stablecoin. You can cash out the ‘alUSD’ to fiat dollars, Bitcoins, Ethereum or anything you like. The DAI still held with Alchemix starts generating a yield (approx. 10-15%) and pays down your loan. Since the interest rate is static, the rate at which the loan gets paid accelerates.
The core element of Defi is its Asset Management and a suite of financial products, including eight ETFs. Bitcoin Zero, Ethereum Zero, Solana, Cardano, Polkadot, Avalanche, Terre, and Uniswap trade on leading European stock exchanges. Smart chain technology allows developers to create synthetic securities that trade on the blockchain instead of a traditional exchange network. The Mirror Protocol is a Defi platform that enables users to create and trade “mirrored assets” that “mirror” the price of stocks. These synthetic stocks are tokenized derivatives that track the value of the actual underlying asset.
Synthetic securities provide their users’ with liquidity, borderless transfer of ownership and censorship protection. It attracts new users quickly because it allows for an additional market rather than just a crypto economy.
Crypto being programmable money will lead to more innovation. Defi indeed is a very modern and decentralized way of finance. It allows you to remain in the custody of your financial assets. With the features and advantages it offers, Defi is sure to disrupt all aspects of financial services and create unimagined opportunities.