eFi is an open, global financial system designed for the internet era, offering an alternative to a system that is opaque, tightly managed, and based on decades-old infrastructure and processes. It allows you to have complete control and visibility over your finances. It exposes you to global markets and provides you with alternatives to your local currency and banking options. DeFi products allow anyone with an internet connection to access financial services, and they are mostly owned and maintained by their customers. DeFi applications have already processed tens of billions of dollars in cryptocurrency, and the number is growing every day.
What can DeFi be used for?
Most financial services have a decentralized alternative. However, Ethereum opens the door to the creation of whole new financial instruments. This is a constantly increasing list.
- Send money all around the world.
- Flow money all over the world.
- Have access to currencies that are stable.
- Borrow money with a guarantee.
- Borrow money with no security.
- Start putting money aside in cryptocurrency.
- Tokens can be traded/exchanged
- Increase the size of your portfolio.
- Your ideas will be funded.
- Invest in insurance.
- Manage your investment portfolio.
Send money over the world in a flash
Ethereum, as a blockchain, is designed to send transactions in a secure and worldwide manner. Ethereum, like Bitcoin, makes transmitting money all over the world as simple as sending an email. Simply provide your recipient’s ENS (Ethereum Name Service) such as bob.eth or their wallet account address, and your money will be sent directly to them in minutes. A wallet is required to send and receive payments.
Flow money throughout the world
You can also use Ethereum to send money. This allows you to pay someone their income by the second, providing them immediate access to their funds. Alternatively, you can rent something by the second, such as a storage locker or an automobile.
If you do not want to send or stream ETH due of its volatile value, there are stablecoins, which are alternative currencies on Ethereum.
Have access to currencies that are stable
Volatility in cryptocurrencies is a problem for many financial products and everyday spending. Stable coins have been used by the DeFi community to solve this problem. Their value is fixed in relation to another asset, usually a popular currency such as the US dollar.
Dai and USDC coins have a value that is only a few pennies off a dollar. This makes them ideal for both earning and selling. Many people in Latin America have utilized stable coins to secure their assets at a period when their government-issued currencies have been highly volatile.
There are two types of borrowing money from decentralized sources.
A borrower will borrow directly from a specific lender in a peer-to-peer arrangement.
Pool-based lending is when lenders contribute funds (liquidity) to a pool from which borrowers can borrow.
Using a decentralized lender has numerous advantages…
Borrowing with discretion
Today, everything about lending and borrowing money centers around the people involved. Before lending, banks need to know if you are likely to repay a loan.
Decentralized lending operates without requiring either participant to reveal their identity. Instead, the borrower must put up collateral, which will be immediately transferred to the lender if the loan is not repaid. NFTs are even accepted as collateral by some lenders. NFTs are a deed to a one-of-a-kind item, such as a painting.
This allows you to borrow money without having to submit any personal information or undergo a credit check.
Access to international finances
You have access to funds placed from all over the world when you use a decentralized lender, not only the cash held by your selected bank or organization. This increases lending availability and lowers interest rates.
Borrowing can let you get the money you need without having to sell any of your ETH (a taxable event). ETH can be used as security for a stable coin loan instead. This provides you with the necessary cash flow while allowing you to maintain your ETH. Stable coins are tokens that do not vary in value like ETH and are therefore preferable for when you need cash. More information on stable coins.
Loans in a hurry
Flash loans are a type of decentralized lending that allows you to borrow money without putting up any collateral or disclosing any personal information.
They are currently inaccessible to non-technical people, but they hint to what may be possible in the future for everyone.
It operates on the principle that the loan is obtained and repaid in the same transaction. If it is not repaid, the transaction is treated as if it never happened.
Liquidity pools hold the money that are often used (big pools of funds used for borrowing). If they are not being utilized at the time, someone can borrow them, do business with them, and pay them back in full at the same time they were borrowed.
This necessitates a great deal of reasoning in a highly customized transaction. Someone using a flash loan to borrow as much of an asset at one price in order to sell it on a different market at a higher price is a basic example.
As a result, in a single transaction, the following occurs:
You borrow X amount of $asset from exchange A for $1.00.
You sell X $asset for $1.10 on exchange B.
You repay the loan used to purchase A.
The profit, minus the transaction cost, is yours to keep.
The transaction would simply fail if exchange B’s supply dropped quickly and the user was unable to acquire enough to cover the original debt.
In the traditional finance industry, you would need a huge sum of money to accomplish the preceding example. These money-making tactics are only available to individuals who already have a lot of money. Flash loans are one illustration of a future in which having money is not always required to make money.
By lending your crypto, you may earn interest and watch your cash grow in real time. Right present, interest rates are significantly higher than those offered by your local bank (assuming you are lucky enough to have one). Here’s an illustration:
You lend your stable coin, 100 Dai, to a service like Aave.
You will be given 100 Aave Dai (aDai), which is a token that represents the Dai you have borrowed.
Your aDai will rise in line with interest rates, and you will notice your wallet balance grows. After a few days or perhaps hours, depending on the APR, your wallet balance will read something like 100.1234!
At any time, you can withdraw an amount of regular Dai equal to your aDai balance.
Lotteries with no risk of losing money
Pool Together and other no-loss lotteries are a fun and imaginative new way to save money.
You spend 100 Dai tokens on 100 tickets.
Your 100 tickets are represented by 100 pl Dai.
If one of your tickets is chosen as the winner, the prize pool will be deducted from your pl Dai balance.
If you do not win, your 100 pl Dai will be carried over to the following week’s draw.
At any point, you can withdraw an amount of normal Dai equal to your pl Dai balance.
All of the interest collected by lending the ticket deposits, like in the lending example above, goes into the prize pool.
Tokens are traded/exchanged
On Ethereum, there are thousands of different tokens. DEXs (decentralized exchanges) allow you to trade different tokens at any time. You never relinquish control of your property. When visiting a foreign country, this is similar to using a currency exchange. The DeFi version, on the other hand, never closes. The markets are open 24 hours a day, 365 days a year, and technology ensures that someone will always be willing to accept a trade.
For example, you will need a token like Dai or USDC to use the no-loss lottery Pool Together (explained above). These DEXs allow you to exchange your ETH for the tokens you want and then back when you are done.
Trading at a higher level
For traders who prefer a little more control, there are more complicated alternatives. Limit orders, perpetuals, margin trading, and other strategies are all viable options. You have access to worldwide liquidity with decentralized trading, the market never closes, and you always have control over your assets.
When you use a centralized exchange, you must first deposit your funds and trust them to keep them safe. Your assets are at risk while they are being deposited because centralized exchanges are appealing targets for hackers.
Increase your portfolio size
On Ethereum, there are fund management solutions that will strive to develop your portfolio using a strategy of your choosing. This is completely automated, accessible to anyone, and does not require a human manager to take a part of your profits.
The DeFi Pulse Index fund is a nice example (DPI). This is an automatic rebalancing fund that ensures your portfolio always contains the top DeFi tokens based on market capitalization. You will never have to deal with any of the intricacies, and you will be able to withdraw funds whenever you want.
Your ideas will be funded
Ethereum is an excellent crowdfunding platform:
Ethereum and its tokens are open to anyone, everywhere in the globe, thus potential donors can come from anywhere.
It is transparent, which allows fundraisers to show how much money they have raised. You may even track how money are used after they have been allocated.
Fundraisers can set up automatic refunds if a specified deadline or minimum amount is not fulfilled, for example.
Financing on a quadratic scale
Ethereum is open-source software, and the community has supported much of the effort thus far. As a result, a new fundraising approach known as quadratic funding has grown in popularity. This has the potential to increase future funding for all forms of public goods.
Quadratic funding ensures that the projects with the greatest unique demand receive the most support. In other words, projects that will benefit the greatest number of people. The following is how it works:
- A matching pool of funds has been established.
- A new round of crowdfunding has begun.
- People can show their support for a project by making a financial donation.
- The matching pool is awarded to projects once the round is completed. Those with the most one-of-a-kind demands receive the most money from the matching pool.
As a result, Project A with 100 one-dollar gifts may receive more financing than Project B with a single $10,000 donation (dependent on the size of the matching pool).
Decentralized insurance intends to make insurance more affordable, transparent, and faster to payout. Coverage is more affordable, and payouts are much faster, because of increased automation. The information utilized to make a decision on your claim is totally open.
Bugs and vulnerabilities can occur in Ethereum goods, just like they do in any other software. As a result, many insurance products in the area right now are geared toward preventing users from losing money. However, projects are beginning to emerge that will provide covering for all life can throw at us. Etherisc’s Crop Cover program, for example, tries to protect smallholder farmers in Kenya from drought and flooding. Farmers who are often priced out of regular insurance can benefit from decentralized insurance.
Portfolio managers and aggregators
You will need a system to keep track of all your investments, loans, and trades with so much going on. There are a variety of products available that allow you to manage all of your DeFi activities in one spot. This is where DeFi’s open design shines. Teams can create interfaces that allow you to not only see but also use your balances across goods. As you learn more about DeFi, you might find this beneficial.