Most DeFi applications and financial products are hosted on the Ethereum Blockchain – the world’s largest crypto platform after Bitcoin. Unlike the Bitcoin Blockchain, Ethereum makes it easy to create different types of decentralized applications on top of it, along with offering faster transaction confirmation times.
The secret of Ethereum’s edge over Bitcoin stems from smart contracts – computer programs stored on the blockchain that automatically execute a transaction when predetermined conditions are fulfilled. Ethereum even created its specific computer languages (such as Solidity) to build and maintain clever contracts.
The work of DeFi projects relies on cryptocurrencies and smart contracts to deliver financial services or products that don’t need any external mediation (such as a local bank). In the modern financial realm, financial institutions act as transactions managers. While helping users send payments all over the world, they also receive tremendous power over users’ personal money. Plus millions of people on the plant still don’t have access to banking services and cannot have a bank account.
In decentralized finance, a role of a transaction manager (and guarantor) will be performed by a smart contract. A contract serves as an Ethereum account that holds a user’s funds, as well as initiates transactions and refunds them upon certain conditions. No one can change this contract while it is running – it will always work as programmed.
For example, if the smart account is designed to pay out an employee’s salary, it can be programmed to transfer funds from Account A to Account B every last Friday of each month. The smart contract will always perform this operation for as long as Account A has sufficient funds. It is impossible to modify it while it is live and steal money from it by adding Account C as a transfer destination.
Smart contracts are also publicly available to be reviewed and audited. This means that even if its performance is compromised, the community will quickly spot and eliminate bugs and vulnerabilities.
However, this never means that you should only trust the most technically-knowledgeable participants of the Ethereum community who can read and refine the smart contract code. The open-source community helps keep developers aware of the inefficiencies, but this need will diminish over time as intelligent contracts are becoming easier to read, and more advanced ways to prove the reliability of code are being developed too.
There are some weighty reasons why Ethereum presents the perfect foundation for the development of DeFi applications and platforms:
The entire work of DeFi can be divided into four key layers:
It is best to see the potential of DeFi in the light of the problems that plague traditional financial organizations:
Decentralized finance represents a powerful alternative to most traditional financial services typical for banks and financial institutions. Here are just a few of the many ways how you can utilize digital money.
Ethereum is designed to send transactions securely and globally. Like Bitcoin, Ethereum makes transferring money around the globe as easy as sending emails.
Choise.com, for example, allows sending different tokens to other users anywhere in the world using only their phone number, even if they have never owned crypto before and have no digital wallet.
Just enter the recipient’s number from your phonebook, and your payment will go straight to them in a few instances (usually). They will receive a link with a newly-generated hot wallet where the transferred tokens are happily sitting ready to work.
You can also stream money via Ethereum. This allows you to pay someone their salary per second, giving them access to their money when they need it. And if you don’t want to send or stream crypto because of their inherent volatility, you can benefit from ever-stable alternative currencies on Ethereum called stablecoins.
Coins such as Dai or USDC never suffer from price fluctuations because their value is pegged to a real-world asset like the US dollar. This makes them ideal for paying or spending. Many people in Latin America have used stablecoins as a way to protect their savings during times of great uncertainty with their national currency.
There is no shortage of borrowing providers in the DeFi space. Borrowing is generally done in two ways:
The greatest advantage of decentralized lending and borrowing is that the transacting parties don’t need to identify each other. Instead, the borrower must provide collateral, which the lender will automatically receive if the loan is not returned. This allows you to borrow money without credit checks or sharing personal information.
With borrowing, you can access a loan without the need to sell your ETH (a tax-exposed event). Rather, you can use your ETH assets as collateral to get a credit. This gives you the cash you need while you also preserve your ETH.
Another perk of decentralized borrowing is that it offers flash loans. A flash loan is nascent a form of crypto lending wherein you can borrow without providing collateral and without revealing your personal information. The principle of unsecured flash loans includes taking the loan from the liquidity pool and paying it back within the same transaction. If the loan cannot be returned, the whole transaction reverses and undoes all previous actions as if nothing has happened.
You can earn interest on your ETH-based tokens by lending your assets to liquidity pools and reaping juicy gains on your electronic capital. Today, many decentralized finance platforms offer significantly higher interest rates compared to conventional banks.
For instance, Choise.com allows its customers to set up a savings account and earn up to 15.6% annually on their virtual holdings – such generosity is impossible to be found with regular banks.
The giant Ethereum Network is home to thousands of tokens. Decentralized exchanges provide an opportunity to trade different tokens with extreme ease. Unlike traditional finance markets (Forex for example), such exchanges are available 24/7, 365 days a year, and the blockchain technology guarantees there will always be someone to conclude a trade with you.
There are fund management projects built on top of Ethereum that will help you to expand your portfolio based on your chosen investment strategy. This happens automatically, is available to everyone and does not require the involvement of a manager to grab a share of your profits.
Ethereum is also known for enabling the creation of crowdfunding applications for fundraisers. Smart contracts in such apps will determine the logic of how funds must be locked and when they can be withdrawn (for example, when the fundraiser has fulfilled certain obligations). Thanks to the transparency of blockchain, sponsors can easily track the process of fundraising and see how funds are spent in the future.
Decentralized insurance is designed to make insurance cheaper, faster, and more efficient. With the more automation ensured by smart contracts, coverage becomes more affordable and payouts are processed much faster. The circumstances to decide on the claim are also completely transparent.
Choise.com is an all-in-one crypto wallet allowing you to unleash the potential of DeFi cryptos. Choise.com offers major DeFi services in one nifty solution, including an exchange, crypto loans, savings accounts, managed portfolio, price predictions, as well as fiat-to-crypto purchases, portfolio management, and instant crypto transfers. With Choise.com, the best what DeFi has to offer is at your fingertips.
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