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Decentralized Finance is the new way of breathing for financial exchanges. Let’s run through some related statistics about DeFi. Since 2020 DeFi space has gained massive traction among the audience that its TVL (Total Value Locked) amounts to $209 billion. The figure states a 204% rise in the TVL.
Let’s go deep down into the intricacies and evolution of new concepts in the DeFi space.
DeFi - Disrupting The Traditional Way Of Financial Exchanges
DeFi, designed with a disintermediate structure, facilitates seamless peer-to-peer interaction while making transactions.
Thus, DeFi has come out breaking the cocoon deriving the strength of Smart contracts operated through blockchain technology. Decentralization, Security, and Scalability lay the strong pillar behind the operation of decentralized finances.
How Is The DeFi Ecosystem Designed To Generate Returns?
Apart from trading cryptos, DeFi infrastructure makes it possible to generate profits by performing various activities. The standard ones are as follows.
Staking: Imagine staking to be similar to the savings bank account where the money is deposited for which interest is credited. In staking, crypto assets are locked, which fetches passive income through interests. But here, the interest rate is higher. Also, staking only works on the blockchain network that functions on the PoS (Proof Of Stake) consensus mechanism. Here the user is expected to lock a certain amount of crypto tokens to be a validator of crypto transactions, i.e., verify the transactions and add them to the blocks. For which the validators will receive staking rewards in native cryptocurrency or tokens. In short, the bigger their stake, the more chances are to participate in validating the blockchain transactions.
Liquidity mining: The user who invests a crypto trading pair in the liquidity pool is called the liquidity provider. For example, a crypto trading pair can have DAI and Ethereum tokens in the 1:1 ratio. So, for the crypto assets traded in the liquidity pool, the LP(Liquidity Provider) will earn rewards and tokens from the trading fees acquired by the exchange platform. This way liquidity pool adds up the gains to the investors, otherwise called liquidity providers. The exchanges in the liquidity pool are performed using Automated Market Maker, a coded program that eliminates the involvement of intermediaries and takes care of the operations.
Yield farming: Yield farming instills a strong use case of decentralized finance. Multiple crypto assets are moved to the DeFi staking platform and made available in the liquidity pool or lending protocol. The Automated Market Maker(AMM) protocol facilitates the borrowing, lending, and staking activities in the platform to yield returns for the users in the exchange platform.
Emerging Trends In The DeFi Verse
Decentralization being deep-rooted in the financial ecosystem allows several techniques to pop up for improving the sophistication and accessibility of making exchanges. Thus, it has become an absolute necessity to look out for the latest progress of DeFi and stay updated to make maximum use of it. Get a tinge of them in the following section.
Concept Of Crypto Bridges
One of the major hurdles of investing in cryptos is traversing through different blockchains. For example, a crypto token existing on the Ethereum chain cannot be used on another blockchain. To overcome this, crypto enthusiasts came up with a newfound way of sending value through crypto bridges from one chain to another.
These bridges allow cross-chain transfer by empowering the assets and information to get on from one blockchain to another. It opens up innumerable opportunities by enabling the users to operate on different blockchains.
These bridges are classified into two types: Trusted bridges and Trustless bridges. Trusted bridges will have a central authority to acknowledge the activities, whereas trustless bridges use smart contracts to automate the functioning.
Self-Repaying Loans
Self-repaying loans are the newest innovation proposed by the Alchemix crypto project, where the users can acquire loans which are paid back by the interest generated from the deposits. To make it more clear, Alchemix requires users to deposit DAI, a stable coin, as a principal; in return, the user can claim 50% of their deposits as alUSD (a stable coin of Alchemix). The alUSD can be exchanged for any other crypto or fiat currency. So say the deposit generates a 10-15% interest every year; that amount is utilized for repaying the loan value taken. Thus, the loan value is paid through the interests generated by the principal amount over a period of time.
Synthetic Assets
Synthetic assets are tokenized derivatives tied to an existing asset, and a token is created for this derivative. Users can trade on the price fluctuation of tokens through these derivatives. Synthetic assets are popular for their flexibility and low gas fees.
Binance Bridge 2.0 - Integrating CeFi and DeFi!
Unquestionably, DeFi acts as a catalyst in driving the web3 use cases such as Non-fungible tokens, gaming, and the metaverse; Now, introducing to you Binance bridge 2.0, which serves as an intersection between the traditional centralized way of banking and the decentralized infrastructure.
To eliminate the hurdles and provide the same smooth experience as CeFi, Binance came up with the notion of creating the first-ever bridge to provide linkage for assets to operate on other blockchains. It made it possible to wrap ERC20 tokens into BEP20 tokens supporting their access to BNB Smart chain DApps. And also, Binance Bridge 2.0 is a trusted bridge with the highest security standards for functioning on the BNB smart chain.
A Quick Catch Up On DeFi Numbers
Underscoring the highlights and ascendance of the DeFi technology, DappRadar has released its report for the first quarter of 2022. The report's key findings include covering major areas such as NFTs, DeFi, etc., which are listed below.
- Blockchain usage has escalated to 396% compared to the first quarter of 2021.
- Blockchain gaming has been the predominant destination for dApp users, accounting for about 50.5% of average daily users and $2.5 billion in aggregate funding.
- Solano and Polygon network usage rose by 34%, challenging Ethereum’s dominance.
- There are also rising cases of security attacks such as hacks and exploits in DeFi that lead to a loss of $1.19 billion. This value amounts to 35.8% of all blockchain funds.
Closing Thoughts
The ascendance of DeFi adoption sets the path clear for new concepts and innovations. Parallelly, this opens opportunities and an increase in DeFi thefts. Fully audited DeFi solutions offer a reliable means for the DeFi project to thrive.
Author Bio
Content crafter with enthusiasm to gain wider exposure to writing technical and generic content. My work in the crypto field is purely driven by the curiosity to witness the progress it is making and is yet to make. On a crisp note, I believe perseverance and passion is the secret to achieving what one desires.
Disclaimer
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