13th Nov 2020


Cryptocurrencies came with the promise of making payments and money accessible to everyone, regardless of where you are in the world. This promise was taken one step further with the introduction of DeFi or decentralised finance. DeFi is working towards creating a global alternative to almost all financial services being used today, including trading, loans, savings, and insurance. Plus, these services would be accessible to anyone with just a smartphone and access to the internet.
DeFi technology is based on smart contracts. Smart contracts can be defined as highly programmable money. These contracts are based on blockchain technology and run mostly on the Ethereum network. Smart contracts are only fulfilled when a set of pre-determined conditions are met. In these contracts, advanced mathematical algorithms are used to ensure sanctity and security, removing the middleman. These programs are also known as decentralised apps or dApps.
Some of the things that differentiate DeFi apps from traditional financial services and their Wall Street counterparts are:
  • The operations of these apps are not managed by any institution or their employees. After the deployment of the smart contract to the blockchain, DeFi apps can run smoothly with little to no human interference. 
  • On the blockchain, the code is transparent and can be audited by anyone. With this, anyone can understand the functionality of the contract or its bugs. This builds greater trust.
  • The design of dApps ensures that they are global from the first day. Most DeFi apps are available to anyone with internet access and a device.
  • DeFi apps have a permissionless nature. Unlike other financial operations today, there are no lengthy forms or gatekeepers. These apps can be created by anyone and used by anyone. 
Naturally, there has also been a great amount of buzz around DeFi tokens. In fact, the total value locked in DeFi contracts skyrocketed from $2.1 million to $6.9 billion between 2017 and August 2020. Some of the most popular DeFi tokens are:
Wrapped Bitcoin is a comparatively new innovation, which has brought Bitcoin to the Ethereum blockchain. WBT is compliant with ERC 20, which is the basic compatibility standard for the Ethereum blockchain. This allows Wrapped Bitcoin to be completely integrated with Ethereum’s ecosystem of crypto lending services, decentralised exchanges, prediction markets and other applications, permitted by ERC enabled decentralised finance. 

Wrapped Bitcoin has the backing of Bitcoin at a 1:1 ratio. It is backed through a network of automatically monitored custodians and merchants. This ensures that the price of WBT is always pegged to Bitcoin, enabling users to make liquidity transfers between the ETH and BTC networks in an autonomous and decentralised manner.
Chainlink (LINK) is a platform built with the aim of reducing the gap between real world applications and smart contracts, based on blockchain technology. Data outside the network cannot be accessed by the blockchain. Therefore, a DeFi instrument is required, which functions as data feeds. In LNKUSD, the DeFi instrument is Oracle.

LNKUSD is described by developers as an ERC 20 token, but it has an added “transfer and call” functionality. With this, tokens can be received as well as processed by the contracts in a single transaction. 
ZRXUSD is an infrastructure protocol, which users can trade ERC 20 tokens on the Ethereum blockchain, without the need for any centralised intermediaries. What makes 0x (ZRX) unique is that it supports non-fungible (ERC 723) as well as fungible tokens (ERC 20). This allows traders to use 0x to buy, sell and exchange a wide range of Ethereum assets, using different apps. There are multiple use cases of 0x, including OTC trading desk, marketplace for digital services and goods, and decentralised exchanges.
Ren is an open protocol that has been built to provide liquidity and interoperability between the various blockchain platforms. This helps overcome the main barriers to entry for DeFi projects. With Ren, users can exchange tokens between any 2 blockchains, without the need for wrapped versions of Bitcoin, such as Wrapped Ethereum. Various fees are charged by Ren for its internal operations, most of it going towards the miners.

DeFi tokens have created great interest in the larger cryptocurrency ecosystem. In fact, they were even outperforming BTC in 2020. But when trading DeFi tokens, adequate risk management measures are vital. So, before opening a position, conduct thorough research. 

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