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2020 DeFi Bible — 5 Must Knows Before You Enter The DeFi Space

19 min readNov 11, 2020
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Total value locked in DeFi has grown from $1B in June to $12B in November. (Source: https://defipulse.com)

1. What is DeFi?

The development of DeFi has expanded the use of blockchain technology from simple value transfer to more complex financial use cases, including savings, loans, trading, insurance, and more.

blockchain, the world’s second largest cryptocurrency platform after Bitcoin. Ethereum is primarily designed for creating and executing smart contracts, which makes it flexible and easier to build other types of dApps beyond simple transactions.

2. The DeFi suite

I. Decentralized exchanges (DEXes) where you own your keys

, , , , and SushiSwap all have slightly different architectures. One of the most popular DEXes at the moment is the decentralized trading protocol . Uniswap is a fully decentralized cryptocurrency exchange that uses Automated Market Making to automatically settle trades and lets users trade popular tokens directly from their wallets.

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Uniswap conducted an airdrop in October 2020, giving away 400 UNI to each address created before September 1, 2020, that conducted at least one transaction on Uniswap v1 or v2. At the time, 400 UNI was worth between 1,600 and 3,200USD, and currently hovers under 1,000 USD.

II. Borrowing and lending — Higher yields, lower cost

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Source: Compound.finance website.

III. Stablecoins — Instant processing, lower volatility

(DAI) and USD Coin (USDC).

IV. Prediction markets — Bet with lower fees and better odds

and are changing this by providing a decentralized, peer-to-peer exchange that enables global and transparent access to its markets. Users keep more of their winnings due to low fees and better odds (thanks to the wisdom of the crowd). An observation from coindesk points out that “DeFi has the potential to boost interest in prediction markets, since they are traditionally frowned upon by governments and often shut down when run in a centralized manner.

V. No-loss lotteries — Play the lottery without losing your money

VI. Synthetic assets — Bet on real-world assets without holding them

Trade stocks like Tesla and Apple on top of Ethereum, without ever holding the actual shares.

VII. Robo-advisors — Automated smart contract-based investment portfolios

’s Robo-Advisor for Yield (RAY) and are two popular robo-advisors that automate the process of finding high-yielding opportunities. RAY targets investors holding ETH, USDC or DAI, who can put their assets into a pool and let the smart contract automatically invest the pool (or part of it) into contracts with the best yield. Rari Capital operates on the same principles, but takes things a step further by offering three separate pools for users with different risk appetites.

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The top 10 DeFi projects in market cap. Source: CoinMarketCap.com

3. Why the craze?

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The yield farming projects with the highest Annual Percentage Yield (APY). Source: CoinMarketCap.

I. Decentralized — Quick smart contract deployment with little to no human intervention, and at reduced cost

II. Transparent — One can verify any and every transaction that occurs on the blockchain

III. Global, permissionless, and inclusive — Anyone, anywhere, anytime

Anyone, anywhere, anytime can access the same DeFi services and networks as long as they have an internet connection.

IV. Interoperable — Open source enables lego-style composability

The modular composability of DeFi lends itself to infinite possibilities as DeFi apps can be put together like “money legos” to build new financial products.

V. Opportunity to earn — Higher interest at lower cost

4. Challenges and risks

I. A repeat of the 2017 ICO boom?

1 min overview of ICOs over the period 2014 — Early 2018. Source: https://medium.com/hackernoon/a-comprehensive-guide-to-icos-crypto-funding-the-rise-the-boom-the-bust-the-next-b159fdf38010

II. Smart contract bugs — Devastating vulnerabilities

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On October 26 2020, Harvest Finance’s FARM coin plummeted almost 60% on the news of a $24M hack and a subsequent $400M drain in liquidity as liquidity providers fled the platform. Source: CoinMarketCap.com.

III. Yield farming — Huge yields at huge risk

Academy explains yield farming as “the wild west of Decentralized Finance (DeFi), where farmers compete to get a chance to farm the best crops.” Yield farmers use (secret) strategies to move their cryptos between different lending marketplaces to maximize their returns. This pursuit of high yields is incredibly complex, risky, and usually unsuitable for general users.

It’s all too easy to get caught up in hype and be blinded by outrageous yields. If you aren’t careful or simply unaware of risks such as hidden backdoors in unaudited smart contracts, it becomes increasingly possible that you could get burned.” — DeFi Pulse about Yield Farming.

IV. Differentiating good and bad projects

V. Security — The biggest risk of them all

’s NGRAVE ZERO is the “coldest” digital wallet available. Another challenge is that users struggle to manage the multiple addresses on multiple individual platforms to access their assets and data. The recently launched DeFi wallet (the first of its kind), , solves this by combining all of a user’s wallets into a single integrated interface without sharing their private keys. It enables users to track, view and manage multiple wallets, assets and protocols in a novel and secure way.

5. What is the future of DeFi?

I. The technology hype cycle

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The “hype cycle” and its phases for Initial Coin Offerings. We’re currently somewhere between the innovation trigger and the peak of inflated expectations. Source: Ruben Merre — Article.

When we look at the current Hype Cycle stage DeFi is in, it’s most likely somewhere between the innovation trigger and peak of inflated expectations.

II. Ethereum 2.0

III. New regulations

“The obligation that crypto-asset issuers must be incorporated in the form of a legal entity could pose significant challenges for DeFi projects where issuance is decentralized and there is no identifiable issuer.”

— XReg Consulting on the European Commission’s MiCA (Markets in Crypto Assets) regulation proposal.

Conclusion — This is only the beginning

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