Decentralized finance is the use of the concept of decentralization specific to cryptocurrencies applied to the principles and mechanisms of finance.
Decentralized Finance Definition
DeFi may be defined as the movement that promotes the use of decentralized networks and open source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps on top of a transparent and trust-less framework, such as permission-less blockchains and other peer-to-peer (P2P) protocols. (Binance.vision)
The Emergence of Decentralized Platforms
An alternative is emerging, much easier and less expensive: decentralized platforms. Just as Uber does not have a vehicle fleet or Airbnb of real estate, these platforms of a new type can be set up without mobilizing capital equivalent to the existing offer, or be subject to binding regulations.
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This blog highlighted the emergence of this new form of finance, Decentralized Finance or #DeFI, whose base is the stablecoin DAI of MakerDAO , the cryptocurrency with properties close to fiat currencies.
Free Competition and its Effects
The benefits of using DAI for borrowers were described in our article on MakerDAO. Several platforms now allow anyone to offer loans to those who need financing for remuneration, based on the principles of over-collateralisation and automated liquidation that we described in our first article.
As mentioned in one of our articles, centralized marketplaces such as Poloniex or Bitfinex offered between 0.5 and 3% of remuneration with high risks of default on payment , of hacks of the platform (Poloniex in 2014, Bitfinex in 2016 ) and volatility of cryptoactive.
When Everyone is a Bank, There is No More Bank
The emergence of neo-platforms in decentralized finance has boosted creditors’ remuneration by making DAI available and offering remuneration rates between 4% on compound.finance and 16% on Nuo.network.
Now, these platforms even allow the use of assets other than ETH as a security deposit: nine assets including two stablecoins (DAI, USDC) are offered on Nuo.network and if only five are compatible with Compound.finance (ETH , BAT, ZRX, DAI, REP), the next update of the platform announces about thirty.
MakerDAO: The Primary Market
MakerDAO will not remain without reacting, since the next update of the so-called “MCD” protocol for Multi-Collateral DAI and planned before 2020, will add other types of assets as possible deposits to the generation of DAI. This technical update was published this week on the Ethereum test network and is therefore preparing to go into production under real market conditions.
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MakerDAO is positioned as the primary market for money issuance and the neo-platforms take the place of a secondary market for the provision of this money supply. This is reminiscent of the functioning of a central bank and commercial banks, these new players replicating elements known to the world of finance.
The classic model based on trusted intermediaries, adding friction and driving costs up can now be called fiduciary finance and contrasted with a new model , decentralized finance. Its objective is not to reinvent the wheel of the financial markets but rather to provide a plural offer, reinforced and optimized by disinter mediation.
