DeFi is another novelty in the cryptocurrency market that has attracted the attention of many investors and users, as well as a lot of money. This system is known as a way to invest, but many people don’t know that there are many other goals.
With DeFi, you can trade crypto assets, tokenize assets (create a digital representation of a traded commodity), take loans, and even lend value to other users – all in a decentralized way, that is, without the involvement of a financial institution.
If this idea interests you, check out this article on what DeFi is, how the concept came about and how the market works, as well as a step-by-step guide to getting started investing.
What is DeFi (decentralized finance) and its Web Development ?
DeFi stands for Decentralized Finance (i.e. Decentralized Finance) and it is a system that allows financial transactions such as income transfer, investments and loans through smart contracts recorded on a blockchain . The goal is to give the public access to the services offered by banks, but without the cost and bureaucracy.
Blockchain (“ chain of blocks” in a loose translation) is the basis of all cryptotechnologies , such as cryptocurrencies and NFTs. In short, it is a database that captures every transaction of buying and selling a digital asset and cannot be changed, which guarantees the security of transactions.
Smart contracts are lines of code written on a blockchain to record financial transactions. This technology guarantees decentralization, since there is no need for mediation in the conclusion of the contract by the operator, that is, the bank. In addition, smart contracts are executed automatically, so you do not need to understand programming in order to use this technology. Kiss.Software is a Web Development DeFi company and can make a huge difference in growing your business.
Thus, DeFi is a way to use the security guaranteed by blockchain technology so that the user does not have to, for example, go to a bank to ask for a loan or make an investment. The offering of these services is called Staking DeFi.
When did DeFi and its Web Development appear ?
DeFi emerged from MakerDAO (MKR) , a loan application created in 2014 by Dane Rune Christensen to run on the Ethereum blockchain, one of the main crypto markets.
Since Ethereum was conceived in 2013, Maker was one of the first platforms to run on the blockchain and still exists today as one of the mainstream DeFi protocols. In it, users can manage and issue DAI, which is a stablecoin , that is, a cryptocurrency backed by a real asset. In this case, 1 DAI is equivalent to 1 US dollar and financial transactions can be carried out with it.
In 2016, The DAO emerged, an organization created to implement smart contracts to fund the development of new products or services. However, in the same year, hackers discovered a vulnerability in DAO systems and pocketed the equivalent of $50 million in ETH (Ethereum’s native cryptocurrency).
Ethereum developers are divided between supporters and opponents of updating the ideals of the project to return the requested amount. This is how the Ethereum Classic (ETC) parallel blockchain was born.
As a result of these changes, other services specialized in decentralized finance appeared, which began the DeFi scenario that we have today.
DeFI market size
In about 10 years of existence, the DeFi market already has millions of users around the world. According to the website Statista, in December 2022, 6.64 million users have already made some financial transactions using DeFi protocols around the planet.
While most of them are in the United States, Brazil has the majority. A survey of the cryptocurrency market conducted by brokerage Huobi around the world showed that Brazil is the second country with the highest number of transactions through the system, about 5% of the total.
The publication calls the country “the number 1 cryptocurrency market in South America.” However, the US stands out in the poll with over 30% of the total.
Overall, the study estimates that this market should remain stable. “We believe the fundamentals of the DeFi market will remain relatively healthy,” the study notes.
What are the biggest DeFi protocols?
To answer this question, let’s turn to the TVL rating of DeFi site Lla ma , which specializes in monitoring the DeFi market.
TVL stands for Total Value Locked . That is, this ranking evaluates the sum of all funds present on the platform to indicate its transactional capacity.
Check out the top five protocols ranked by DeFi Llama.
1. Lido
The Lido DAO (LDO) Platform, launched in December 2020, is a platform that offers liquidity to assets stored on the Ethereum blockchain. When investing in this environment, the user contributes a portion of 1 ETH and can earn passive income as long as the asset is held.
2. MakerDAO
The DeFi pioneer works through the DAI stablecoin , which is one of the main ones in the market and is widely used in other protocols. The platform has a convenient configuration that allows you to control such parameters as stability rates, interest rates and collateral assets.
3. GHOST
The AAVE protocol takes its name from its own cryptocurrency. A user who deposits cryptocurrency receives interest . However, in order to take out a loan, you must pay a fee and leave another digital asset as collateral.
4. Finance Curve
The Curve Protocol (CRV) is based on the Curve dollar stablecoin (crvUSD). Users receive annual rewards for staking cryptocurrencies within the protocol.
5. Uniswap
Uniwasp (UNI) works similarly to centralized exchanges like Binance and Coinbase. However, it is self-managed, meaning there is no middleman to manage custom articles.
What are DeFi cryptocurrencies?
In the above ranking, you may have noticed that when we introduced each protocol, there was an abbreviation in parentheses next to the name. This acronym refers to each protocol’s DeFi cryptocurrency , also referred to as native cryptocurrency or native token.
It is the use of this cryptocurrency that makes it possible to conduct financial transactions within the framework of the DeFi protocol. That is, it is with the help of DeFi cryptography that you will be able to make investments or loans within the framework of the protocol.
What is the best DeFi?
A good way to determine the best DeFi cryptocurrency is to compare the market cap value of all of them. According to CoinGecko rankings, in January 2023, the top five DeFi cryptocurrencies with the highest value are:
- Lido Staked Ether (STETH): $6.08 Billion
- Dai (DAI): $5.05 billion
- Uniwasp (UNI): $4.06 billion
- Chainlink (LINK): $3.12 billion.
- Lido DAO (LDO): $1.97 billion.
Other criteria can be adopted to indicate which DeFi is the best, the value is not the only one. Therefore, before making this choice , study the market well.
How to invest in DeFi?
The procedures required to invest in DeFi may vary depending on the chosen protocol. In general, the steps are:
- Select the polling protocol you are going to use to see if it suits your needs.
- Install a digital wallet on your device that is compatible with blockchain networks such as MetaMask, Luno and Exodo. It can be a mobile app or a browser plugin .
- Customize access to your personalized network based on the data provided by the platform you use.
- Go to the website of the protocol of your choice and check which liquidity pool (i.e. the combination of two cryptoassets) has the largest volume.
- In the protocol system, select the option to add liquidity to the platform.
- Select cryptocurrencies that form a pair in your search
- Set the minimum and maximum price for each of the two selected crypto assets.
- Confirm your choice.
Risks of DeFi
While it is a very profitable technology, DeFi also comes with its own risks. Know some of them:
- Programming Error: Blockchain works by inserting lines of code into a database. This task is automated, which reduces the risk of failure, but any mistake can cause irreparable damage.
- Cybercrime: DeFi has grown strongly and attracted the attention of many investors, which also leads to an increase in hacker activity in this market.
- Non-permanent loss: This is the change in the price of your crypto asset at the time you deposit to invest in exchange for the liquidity of the protocol, which can result in losses rather than profits.
Remember that in order to invest in any cryptocurrency market system, you need to do a lot of research and choose the best options according to your characteristics and needs.