(Of course, whether the protocols in question will last a whole year is up for debate). These so-called governance tokens, which can also be used to vote on proposals to upgrade the network, are tradable on secondary markets, meaning that some annual percentage yields work out at 1000%. Many of these lending protocols offer crazy interest rates, bumped up even higher by the phenomenon of yield farming, whereby these lending protocols offer additional tokens to lenders. ![]() īut it’s wildly lucrative for some traders. In even some of the largest DeFi protocols, close readings of their smart contracts reveal that teams hold immense power or the contracts are vulnerable to manipulation. The space has been known to fall short of its lofty ideals. ![]() Unlike, say, depositing your money in a bank or lending out your crypto with a crypto loans company (such as Cred ), with DeFi protocols you always maintain control over your cryptocurrency.ĭecentralized means that the creators of these protocols have devolved power over their smart contracts to the community-in the spirit of the hacker ethic, their creators vote themselves out of power as soon as possible and let the users vote on the future of the network. Non-custodial means that the teams don’t manage your crypto on your behalf. What earns these protocols the DeFi tag is that they are-at least in principle or ambition- decentralized and non-custodial. And other services port Bitcoin to Ethereum in a non-custodial manner or offer decentralized price oracles, which, among other things, allow synthetic assets to accurately peg themselves to their non-synthetic likenesses. DeFi’s also about synthetic assets, like Synthetix’s tokenized stocks or Maker’s decentralized stablecoin, DAI, whose value is algorithmically determined by the protocol. Then there’s Uniswap, a decentralized exchange that lets you trade any Ethereum-based token you like, or earn money if you add liquidity to that token’s market. You can also earn interest from lending out cryptocurrencies. These are protocols that let you borrow cryptocurrencies instantaneously-and often in large amounts if you can prove you can pay back the loan in a single transaction. How does DeFi work?Īmong the most popular projects are lending protocols Aave, Maker and Compound. The decentralized finance world is made up of a multitude of non-custodial financial products, built around a culture of highly-experimental, highly-lucrative crypto projects that’s caught the eye of top companies and venture capitalists -and not a few scammers. The DeFi movement refers to a specific genre of financial product that champions decentralization above all else, and uses lucrative incentive mechanisms to encourage investors to play along. So what is this powerful, wild beast known as DeFi? And isn’t all of crypto decentralized finance, anyway? Sort of. By January 2020, "DeFi degens" had poured over $20 billion worth of cryptocurrencies into DeFi smart contracts. Back in June 2020, just $1 billion was locked up in DeFi protocols, according to metrics site DeFi Pulse. ĭeFi is crypto’s big thing at the moment, a little like how Initial Coin Offerings (ICOs) were all the rage back in 2017. DeFi is a highly experimental and risky niche within the wider cryptocurrency space.ĭecentralized finance, or DeFi, sits at the white-hot center of the recent crypto bull run.They include decentralized exchanges, lending protocols and synthetic derivatives.The decentralized finance world is made up of a multitude of decentralized, non-custodial financial products.
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