What is DeFi?
A new form of finance is evolving within the Bitcoin and crypto space coined as DeFi. DeFi is an abbreviation of the term “decentralized finance” and is similar to the legacy financial system but without the need for a centralized party. For example, if you were to purchase stocks or shares of a company, a broker and an exchange would be required to buy, sell, and hold those shares for you. With DeFi an intermediary is not required to facilitate trading between two entities.
These financial services or applications are built on top of cryptocurrency networks like Bitcoin and Ethereum. DeFi is defined as not being controlled by a single or centralized source. Bitcoin is the ideal network to build DeFi apps and services because it is the most decentralized network in the world. A decentralized monetary network requires numerous checks and balances from nodes and miners. This is to ensure that a minority of bitcoin holders are unable to control the network without consensus from the rest of the network participants.
Why do people need DeFi?
DeFi is an excellent solution for those who currently do not have access to certain services like loans, lending, yield, financing, smart contracts, and a number of other financial products that are popular in more developed countries. Other potential users may also prefer DeFi for privacy reasons depending on the application or service that is being used on top of the Bitcoin network. DeFi applications and networks are also generally cheaper to utilize than what is being offered from a commercial or central bank.
How can I use DeFi with Bitcoin?
DeFi is a very broad industry which essentially encompasses all available financial products in the legacy system. Some of the popular DeFi products and services include:
-Asset management tools like wallets or view only user interface applications.
-Decentralized exchanges (DEXs) that do not require a centralized company to facilitate trades.
-Margin trading services that are peer-to-peer rather than borrowing or using leverage provided by trading platforms.
-Infrastructure and developer tools like APIs and out of the box Lightning payment libraries to integrate into apps or websites.
-Payment solutions like Lightning Network help with scaling payments while node operators receive transaction fees for providing channels.
-Stablecoins that are backed 1 to 1 with fiat or bitcoin.
-Analytics tools that provide on-chain analysis to provide information of network activity.
Top three projects bringing DeFi to Bitcoin
- Lightning Network – The Lightning Network is built on top of the Bitcoin network as a layer 2 solution for immediate settlement transactions. Lightning provides low cost transactions for Bitcoin and the potential replacement of credit card processors.
- LN Markets – LN Market users are able to trade derivatives on the Lightning Network from any Lightning wallet. LN Markets were developed for traders who want the convenience of instant settlement instead of waiting 10 to 40 minutes through on-chain settlement. It is also cheaper to use LN Markets for large bulk order trades.
- Bisq – Bisq is a decentralized exchange that cannot be shut down by governments. Decentralized exchanges are platforms that allow users to buy and sell bitcoin (among other cryptocurrencies) with other users across the globe. These platforms do not require personal or financial information from users. Buyers and sellers must provide a security deposit in the event that either side of a trade attempts to not fulfill their end of the agreed upon deal.
ChainMyne offers a variety of DeFi tokens that can be bought and sold at market prices, however, an additional DeFi project that may be worth checking out is the Sovryn application. Sovryn is a decentralized Bitcoin trading and lending platform that allows users to hold their own keys. A full breakdown of their services and infrastructure may be found in their blackpaper.
Criticisms and risks of DeFi
To fully understand a decentralized app that one is considering to use, it is important to do the necessary research for understanding the risks involved. If any application or service requires a user to give up the keys to their funds, there is a much larger risk of losing those funds. It is important to reach out to the communities and developers involved in the projects as well if possible. They will have first hand experience in how to use and optimize the tools available.
Should I use DeFi?
If there is a financial service that you do not have access to in your area or are unable to participate in, it may make sense to learn how some of the mentioned DeFi projects operate. It is very important to understand all the risks associated with using each application as well. There are a number of projects that claim to be decentralized or may claim to follow best security practices when in fact they do not. It is up to every individual to come up with their own risk assessment for using DeFi.