What is DeFi and why is it the hottest ticket in cryptocurrencies?
One area in cryptocurrencies attracting huge attention is DeFi or decentralised finance. This refers to financial services using smart contracts, which are automated enforceable agreements that don’t need intermediaries like a bank or lawyer and use online blockchain technology instead.
Between September 2017 and the time of writing, the total value locked up in DeFi contracts has exploded from US$2.1 million ($2.9 million) to US$6.9 billion ($9.5 million). Since the beginning of August alone it has risen by US$2.9 billion ($4 billion).
This has driven a massive rise in the value (market capitalisation) of all the tradeable tokens that are used for DeFi smart contracts. It is now around US$15 billion ($20.7 billion), almost double the beginning of the month.
Numerous tokens have risen in value by three or four times in a year – and some considerably more. For example, Synthetix Network Token has increased more than 20-fold, and Aave almost 200-fold. So if you had bought £1,000 ($1,800) of Aave tokens in August 2019, they would now be worth nearly £200,000 ($364,000).
DeFi, most of it built on the ethereum blockchain network, is the next step in the revolution in disruptive financial technology that began 11 years ago with bitcoin. One area in which in which these decentralised applications (dApps) have taken off is cryptocurrency trading on decentralised exchanges (dexs) such as Uniswap. These are entirely peer-to-peer, without any company or other institution providing the platform.
Other DeFi services now in use allow you to:
- Borrow and lend cryptocurrencies to earn interest using platforms such as Compound or Aave.
- Bet on the outcome of events using Augur.
- Create and exchange derivatives of real-world assets such as currencies or precious metals on Synthetix.
- Take part in a no-loss lottery on PoolTogether, where everyone gets their money back and one lucky participant wins all the interest that has accrued in a shared pot.
- Buy cryptocurrencies known as stablecoins, which are pegged to the value of a particularly currency or commodity. For example, DAI and USDC are both pegged to the US dollar.
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