Cryptocurrencies

How can DeFi ensure better financial inclusion? – Cryptocurrencies

The year is 2030 and DeFi (Decentralize Finance) has grown to the point of becoming an indispensable tool. CeFi (Centralize Finance) represented by our traditional banking institutions still exists but is only used for term loans. For all payments, savings and financial products, the blockchain has become the master. But how did we get there?


The emergence of DeFi

DeFi or decentralized finance represent the application of classic finance products using blockchain and cryptocurrencies. The first project that launched this dynamic was The Maker DAO (Decentralize Autonomous Organization) with its two tokens: the DAI who is stable corner that is to say a cryptocurrency dedicated to being stable backed by a fiat currency in our case the dollar and the token MKR which serves to regulate the DAI flow. Indeed the tokens are burned or created in order to ensure that the DAI is consistently equal to $ 1.

The Maker DAO was the first to introduce the possibility of making collateralized loans thanks to a smart contract on the Ethereum blockchain. A collateral can be defined as a financial guarantee. Concretely when I deposit ETH (Ethereums), I can then borrow a certain number of DAI. So paving the way for new ways to use cryptocurrency. Therefore, it was then possible to deposit your ETH that we wanted to keep in the long term in a vault Maker in order to generate DAI which can then be exchanged again for another cryptocurrency. On its initial investment if the right choices are made, the gains can therefore be multiplied.

Let us take a concrete case. When I want to make a loan I must first deposit an amount in ETH in the Maker safe, for example 1000 dollars.

I can then have 66% of the blocked sum in the trunk in DAI. Remember that 1 DAI is equal to 1 dollar, so I could have 660 dollars.

When I want to get my ETH back, then I will have to pay those 660 dollars. If in the meantime the price of ETH drops, I will have to pay penalties. On the other hand if he goes up, here I am again with my ETH worth $ 1,500, if the price of ETH has taken 50%.

Finally there is a last case, if the value of my ETH drops below $ 660 before it happens, my ETH will be auctioned to recover DAI.

The MakerDAO was just the first block of a long chain but we could already see the opportunities that this system offered.

The use cases of DeFi have multiplied

After some time new players have emerged creating a new sector in the landscape of our blockchain ecosystem. Companies such as Aave offered decentralized finance products such as lending. Let’s take a look at how lending works, it breaks with the codes of our current institutions.

Instead of going through a trusted intermediary Like banks to save money, lending allows you to perform actions similar to the banking process. But directly from particular in particular changing the return of this good old booklet A (0.5%) to an ROI (return on investment) between 4% and 8%.

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Cryptoassets are highly volatile unregulated investment products. No EU investor protection. Your capital is at risk.

In order to ensure that you are give your money back, these loans are made in the form of loans from Leibniz. The speculator who borrows your money in order to leverage sees its closed position at the very moment he passes below the threshold for you repay with interest. You are therefore assured of review your money. Moreover, you can withdraw it at any time unconditionally.

This same process to evolve over time in order to allow both the borrower and the borrower to be rewarded in governance tokens. We especially remember the issuance of the governance token of Compound, the token COMP. Thus the strategies ofefficiency optimization have also evolved. It is then possible to make a loan as collateral and inject the generated cryptocurrency in order to increase collateral in order to maximize his obtaining of COMP.

And yes, let’s say that lending yields 10% per year and that the borrow (borrowing) also yields 10% per year. On an initial sum of $ 1,000:

  • 1000 dollars are deposited to enable the loan
  • 500 dollars are borrowed
  • These $ 500 are used to increase the initial deposit to $ 1500

If I only had to lend my 1000 dollars I would have only had 100 dollars of ROI (Return on Investment) after a year. Except with this type of assembly at the end for the same period and with the same initial investment I will end up with a ROI multiplied by 2. Indeed, by benefiting from my $ 500 borrowed I will generate $ 50 COMP and on my 1500 dollars loaned, $ 150 COMP. For a total if you follow which would therefore be 200 dollars. In addition, applications today automate these processes such as InstaDapps. It is therefore possible for everyone to benefit from these strategies without necessarily having need in-depth knowledge of the operation of DeFi.

Market manipulation for all

We know that the richest in our world used to work together to make certain economic decisions so they were able to manipulate the markets and thus ensure optimization of their personal finances. Except we know it from playing with the stock market, they were playing with it people’s lives indirectly. The cryptocurrency universe was very different from its inception, alone the people who invested could suffer the consequences the variation of prices.

The flashloan or lightning loan in French came then disrupt the paradigm existing. It was then possible for anyone to have colossal sums for a moment. The flashloan allows you to borrow the amount you want without consideration, the only condition is to be able to repay it in the same block. If following the various actions the amount returned is less, all actions taken are canceled. Arbitrage had therefore become accessible to everyone, observing the possible combos thanks to the slight differences between different trading platforms. A tool Furucombo notably helped people in the inability to develop themselves their bot thanks to a user friendly interface representing the different actions that the user can perform in the form of cubes. The popularization of flashloans led to rising gas prices, as well as an increasingly higher difficulty to find opportunities.

Financial inclusion, but at what cost?

As we have seen, DeFi offers the less affluent people the possibility of being able to invest their money and make it grow significantly. The values ​​conveyed by DeFi were totally in line with financial inclusion however, another barrier stood in the way of inclusion lack of knowledge. Indeed, the Blockchain already required real determination in order to be assimilated, DeFi then only represented 5% of active wallets. Everyone within the ecosystem could not indulge in DeFi. She asked to be aware of all the projects that went out and required a body capable of not sleeping very much, therefore limiting new users entering this segment.

The implementation of DeFi made easier by players like Binance sounded the first shot towards democratization and more use DeFi dresser. He then used the staking method, the client only had to “staker” his tokens, Binance therefore took on the role of intermediary in order to communicate with the different DeFi products. The user only saw the rewards of this process.

Things really evolved and allowed DeFi to take a hit when physical players like classic banks and crypto-banks have entered the game. As you know it is now possible to open a B booklet for Bitcoin in any banks or a PEC (Cryptocurrency savings plan). True inclusion happened when mr everyone finally had the possibility of joining the DeFi movement without having to understand it thanks to a trusted third party. Paradoxical for a finance that wants to be decentralized?

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Cryptoassets are highly volatile unregulated investment products. No EU investor protection. Your capital is at risk.

In its beginnings, decentralized finance, although allowing financial inclusion through the various processes mentioned above, had a significant barrier. That of knowledge, to understand DeFi, you had to first have a foot in the blockchain ecosystem and then be interested in the various DeFi projects. Something that was not so easy. Today things have changed a lot and the evolution of our society allows anyone to benefit from the advantages and offers that DeFi offers thanks to the players who have positioned themselves as a trusted third party. As before, blockchain is no longer a technology covered in a veil of obscurantism where only enthusiasts can find the light. It has become a commodity used by everyone, we no longer talk about the blockchain: we use it. This is how democratization took precedence. The distribution of wealth remains a problem in our society, but the chances of development within the latter have improved considerably. What will be the next steps for blockchain? The future will tell us in 10 years!

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