The first half of November was, by far, the wildest part of 2022 in crypto. The FTX drama created shockwaves and untold damage. This is not an article about FTX. This is an article about DeFi, but to explain the significance of DeFi, it first helps to understand some FTX context.
Binance, one of the largest crypto exchanges, is run by Changpeng Zhao (aka CZ).
FTX, its (now ex-) competitor, was founded by Sam Backman-Fried (SBF).
CZ invested in FTX and, when he decided he didn’t want to own it anymore, he sold his stake and took payment in FTT, a crypto token used on the FTX exchange.
CZ began a run on FTT, which made it difficult for FTX to maintain its liquidity. As a result, FTX consented to be bought by Binance in order to avoid bankruptcy.
The deal fell through.
The situation worsened when it was revealed FTX’s business was interlinked with Alameda Research, a quantitative cryptocurrency trading firm. “The net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token”, said Cory Klippsten, CEO of Swan.
Long story short: a money laundering scheme that escalated very quickly.
Due to FTX’s bankruptcy, any centralized crypto business, that serves as a custodian of client money, is now regarded with distrust.
Most likely, skepticism about CeFi (centralized crypto finance) will be on the rise. Centralized exchanges (CEX) must provide evidence that their clients’ cash is secure.
However, many CeFi users and traders might decide to make the switch to DeFi (decentralized finance).
The crypto space innovates rapidly, and DeFi seems to have built a solid, sustainable growth trajectory. It is revolutionizing the approach upon which financial platforms are built.
In this article, we provide an introduction to DeFi and cover its most popular use cases.
The best way to understand DeFi or Decentralized Finance is in contrast with traditional finance.
Traditional finance is, to begin with, centralized – managed by a central authority. Transactions are not transparent, transfers may take several days. There are many regulations and costs that often stifle innovation.
DeFi, on the other hand, is very different. It is meant to be a financial system open to everyone, decentralized, and totally transparent. Users retain sovereignty over their assets and are able to transfer value, globally, without middlemen or high fees.
How is this possible?
Through smart contracts. They play a big role in DeFi and, simply put, are simple programs on the blockchain network, used to automate transactions. Most of them run on the Ethereum blockchain.
This allows complete transparency because there is no intermediary managing the transactions.
Additionally, one can start using DeFi applications simply by setting up a wallet, which is far easier than opening a bank account. Transfers occur almost instantly, through the blockchain.
DeFi’s most popular uses
- Borrowing and lending platforms
Borrowing and lending platforms are the areas of DeFi that are expanding the quickest. Users deposit money and start earning interest from those who borrow their assets. DeFi offers a lot of loan alternatives with competitive interest rates.
- Decentralized exchanges (DEX)
DEX’s a type of crypto exchange that allows for safe & direct peer-to-peer swaps, without intermediaries.
Individuals can trade – with low fees – between tokens while maintaining full control.
- Decentralized stablecoins
Stablecoins are the foundation of DeFi, and they serve – as the name suggests – to guarantee the stability of the ecosystem.
Everyone is concerned about crypto volatility, so stablecoins play a significant role by being “pegged” (or tied) to a more stable currency, such as the US dollar.
Many DeFi supporters claim that a crypto disaster, similar to FTX, could be avoided in the future by using DeFi and massively transitioning to a decentralized ecosystem. However, it has its own downsides – operational and technological risks, unfriendly UI, lack of fiat exchanges.
If you want to check 5 of the best DeFi projects to follow in 2023, go to this article!
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