What is DeFi? Detailed explanation

 

https://www.lispnft.net/2022/04/what-is-defi-detailed-explanation.html

which is "defi" well it means decentralized finance in the past,

 we have always used centralized finance i.e. there is a central authority that controls the flow of money the government and the banks control it they don't really say they do it but they do it do they can print more if they want they can stop you from borrowing it if they don't want,


 they can even block you from having a bank account if they wanted to at any time, they could have your money, they have your money so they can change it and you really can't object to that,

i mean you could but how would you prove you gave them your money it was also based on trust if you run a business,

they limit what you can do for example right now if you have a small business of magic trees which may be for medical purposes they may say you must not take that business money to the bank which makes you seriously limit,

that means you can't deposit it or invest it or even use it to keep it safe again a traditional thing finance it's quite expensive payday loans go up to 500 credits cards can average 25 and even by personal loans can cost you 18 of your worth these are very high rates but you pay them if you need them because that's what you have the alternative is decentralized finance where there is no banks instead there are pieces of code that work and act like a bank,

they are open to everyone, they don't force you to trust them because they are literally a piece of code running a program if you wanted to, you can read go all the way and check that it doesn't fit you scam,

they are also censorship resistant and finally they are much cheaper than traditional centralized finance decentralized finance is based on three main elements cryptography blockchain technology and smart contracts if you don't know what that is we recommend highly check out our other videos on these topics where we break these topics down using stories, examples and analogies so simply that even you grandpa could understand them now, this is going to be a bit longer video, but this is a very broad and growing topic If you understand blockchain cryptography and how smart contracts work,

let’s dive into the five pillars of the number one decentralized finance of stablecoins. So first of all we need to understand the bridge of decentralized finance to centralize finance and it is cryptocurrency that is associated with a real world. the asset, for example, tether and USD coin are all what we call stablecoins,

this is because their price is pegged to the us dollar, think of it like this when you buy one for a dollar, a new usd coin is minted when you take one out, a usd coin is burned,

so the coin is still worth a US dollar now the goal is to have a reliable way to buy and sell certain coins without having to buy and sell them instead we can just trade them here is an example of why it might be beneficial Say you bought ethereum at 500 well now it's a thousand dollars and you want to sell because you think it's high, you want to take your profits without stablecoins,

you have to sell your eth ereum to a centralized exchange like coinbase or binance and in return they will give us dollars for it now of course they are going to take a cut of that transaction because they want a fee and they are going to take it also the irs makes you pay tax on all income you trade or sell coinbase and gemini will say you did it so you can't really get around it,

the next step would be to wait for coinbase or binance to give them to your bank and then take them out of your bank because you don't really want the bank to have good control of your money a month later ethereum drops to 250 and you want to buy some no longer then you deposit your 1000 into coinbase wait a few days until the transaction is cleared because you have to wait and t then buy for ethereum and hold them tight ethereum goes back to 500 and you decide to sell so you sell them to your exchange centralized you bite the fees and then you wait a few more days for it to reach your bank account .

Look in this example, there are a lot of fees, there are taxes and there is a waiting now let's say $1,000 and you keep it after a month Similar to the previous example, it goes down to 250 and you exchange $1000 for Ethereum and then it goes up to 500 and here's the useful part within five Minutes sell you for Ethereum for two thousand dollars,

 The fee was less than one percent because you used what we call a decentralized exchange to trade which is something we will explain later but because I was able to trade almost instantly plus the usdc was safe and I trusted it because it's just a token that doesn't change unlike coinbase or binance or gemini which you control government and most importantly people who have been hacked before anyway we are off topic, so this is the purpose of stablecoin,

 You can be in the crypto world without using the government owned bank currently in many places we take banks for granted. Same as in the US, but some countries are really restricted and how much money you can move around or what currency you can actually buy in in the US, every transaction over ten thousand dollars has to be checked and approved by a bank at the time same using stable currency like usdc,

You can move $10 million from one address to another without anyone blinking for a five-dollar fee. You can't do that with US dollar borrowing and lending, so the other pillar of decentralized finance is lending and in fact,

 Borrowing a large part of our current financial situation in the world depends on the lending and borrowing of money, so it makes sense that blockchain could do that better, one of the reasons we can lend and borrow reliably with banks is that we usually put something under 20 collateral even If we do not pay off the loan in full,

 Our government can go after us and throw us in jail or make us pay In short, there are legal consequences for not paying the loan well with cryptocurrency, this is a problem because one of the pros of crypto is your anonymity, you can throw out 20 of it and run away with never seeing the rest of the loan again, So we have to find a way to actually solve this by using smart contracts, we can actually let others use our money while keeping it,

So let me give a small example someone who wants to earn interest on their coins while being there as person b wants to borrow some coins so person A goes to the boat or ave which are two platforms that allow borrowing and lending of cryptocurrency and person deposits their coins in a smart contract if you don't know Indeed smart contracts are just a token that works in turn called c tokens or tokens that represent its original currency plus interest whenever he wants he can just convert the tokens or c tokens to that smart contract t was created by the compounder ave and they cashed his original deposit In addition to interest now,

 The smart contract is created in such a way that no human has to do the computation or has to do the transaction, all automatically by code so that person resolves the desire to earn interest by lending in a traditional way In the borrowing part, person B has to do something called Increase the security of his loan, meaning that if he wants to borrow 100,

He should pay $120 this way if he runs away and never pays off his loan, the smart contract is written in such a way that he can pay off his coins to the individual plus interest Now at this time, you might ask what is the point of getting a loan if you already have the money well you might be thinking In US dollars we say that you have 10 Ethereums worth 1000 because each of them is worth 100 but you don’t want to sell them because you strongly believe in the Ethereum project, so you can put it up as collateral and borrow the value of 800 from the rope which is a fixed currency pegged to the US dollar,

 So you're trading that eight hundred dollars around you make some money, you make some money, now it's time to pay off your loan you have eight hundred and fifty dollars in the cable and you pay off the original loan of eight hundred dollars to get back 10 of Ethereum well In this little example, you won fifty dollars from The little deals you made and got lucky,

But it was also a few months and what happened in the last few months has exploded and is now worth 150 each now You have 10 Ethereum at $150 each so now you are in control of $1500 plus the $50 you made in trading basically if you believe in Ethereum and have but don't want to sell it and want to use its value,

You can borrow it with the hope that it will be worth more the more you spend it but if you trade and you lose some money and then you lose some money and you probably end up with $750, you have two options Option A is to make an extra 50 to pay off the entire 800 loan to get all back Your collateral and option B is to keep your 750 and lose 10 of your Ethereum which can be very valuable now this might be an information overload but its real fast,

There is a second type of loan in crypto called flash loan which is a loan that lasts for 10 seconds if you can buy ethereum for 10 on coinbase and then sell it for 11 on gemini in theory you can earn a dollar every time you do a so you can use what we call a quick loan to borrow Literally millions of dollars, you don't have to put any money,

All you have to do is write a quick loan to borrow $10 million telling it to go buy Ethereum for $10 and then immediately sell it for $11 then pay off the original $10 million loan and each tiny little smart contract gets executed in basically 10 seconds,

 You got a million dollars minus the fees you had to pay to borrow but those fees are small because the lender knew you were going to have to pay it back and that was for a very short period of time now this is a more advanced technology but you can never do that kind of arbitrage in The number three traditional financial decentralized exchanges, well, you have a friend who traveled to London a few years ago from the United States now of course in London,

 The standard currency is the Euro while here in the US it was normal for him to visit the foreign exchange booth and exchange his dollars for Euros Unfortunately for him the fee was like 15 so he immediately lost 15 percent of his money because that's what foreign exchange dealers don't Tourists know it better than that and they need local money so what do they do Do they make good use of these people when it comes to decentralized finance instead of a forex dealer, we have a so called decentralized exchange where you can exchange your coins and tokens for other coins and tokens now,

 The fees are usually quite small like less than half a percentage, which is a huge benefit for anyone who regularly wants to trade their crypto assets, most of the most popular decentralized exchanges or decentralized bonds operate in such a way that investors pool their money together and then traders can trade that money for a fee every transaction. The aforementioned is back to these investors and it's all written in code so it's not changing a government that can't step in and your saying you can't buy bitcoin anymore, the fees and percentages you change are locked in too,

 They are written in token so they don't change and they can't drive crazy prices like 15 decentralized exchanges that open up the whole world A new variety of tokens and coins, for example coinbase, the first centralized exchange to come out to the public that only allows you to buy and sell 32 cryptocurrencies right now because Because the government regulates it and must abide by certain regulations,

 It is the most popular decentralized exchange called mono exchange literally hundreds and possibly thousands of tokens that you can trade and it is not regulated by anyone who is the decentralized part, there are billions of dollars locked up in these liquidity pools so that traders can trading but no one can control these billions of dollars, they are following a program that someone wrote in reality,

 Only the investors can withdraw their money out of the pool but if they do that then the lending rates will go up and so new investors will come in and put their money in like I said earlier the code can't be changed either it's what we call immutable. The crypto space we like to say the code is the law that is not controlled by the government, since the code has access to the code and does not change the uni swap, which is one of the major exchanges on the ethereum network and has billions of dollars in bundling swaps You have 10 Ethereum at $150 each so now you are in control of $1500 plus the $50 you made in trading basically if you believe in Ethereum and have but don't want to sell it and want to use its value,

You can borrow it hoping it will be worth more the more you spend but if you trade and lose some money and then lose some money and maybe end up with $750 you have two options Option A is to make an extra 50 to pay off the entire 800 loan to get back all of your Your collateral and option B is to keep your 750 and lose 10 of your Ethereum which can be very valuable now, this may be an information overload but it is very fast,

There is a second type of loan in crypto called flash loan which is a loan that lasts for 10 seconds if you can buy ethereum for 10 on coinbase and then sell it for 11 on Gemini in theory you can earn a dollar every time you do so you can use what we call a quick loan to borrow Millions of dollars virtually, you don't have to put any money,

All you have to do is write a quick loan to borrow $10 million telling it to go buy Ethereum for $10 and immediately sell it for $11 then pay off the original $10 million loan and each very small smart contract is executed basically 10 seconds,

 You got a million dollars minus the fees you had to pay to borrow, but those fees are small because the lender knew you were going to have to pay it back and it was for a very short time now this is a more advanced technology but you can never do that kind of arbitrage on traditional decentralized financial exchanges Number three, well, you have a friend who traveled to London a few years ago from the United States now of course in London,

 The standard currency is the Euro While here in the US it was normal for him to visit the foreign exchange booth and exchange his dollars for Euros. Merchants Tourists don't know more than that and need local money, so what should they do? Do they make good use of these people when it comes to decentralized finance rather than a forex trader,

 We have a so called decentralized exchange where you can exchange your coins and tokens for other coins and tokens now,

 The fees are usually quite small like less than half a percentage, which is a huge benefit for anyone who regularly wants to trade their crypto assets, most of the most popular decentralized exchanges or decentralized bonds work in such a way that investors pool their money together and then traders can trade that money for a fee in each transaction . The above is up to these investors and it's all written in code so it doesn't change a government that can't step in and your saying you can't buy bitcoin anymore, the fees and percentages you change are locked in too,

 It was written in the form of a token so that it does not change and cannot drive crazy prices like 15 decentralized exchanges that open up the whole world a new variety of tokens and coins,

 For example coinbase, the first centralized exchange to come out to the public that only allows you to buy and sell 32 cryptocurrencies at the moment because it is regulated by the government and must adhere to certain rules,

 It is the most popular decentralized exchange called mono exchange literally hundreds and possibly thousands of tokens that you can trade and it is not regulated by anyone who is the decentralized part, there are billions of dollars locked up in these liquidity pools so that traders can trade but no one can control these billions of dollars, they are watching a program that someone actually wrote,

 Investors can only withdraw their money from the pool, but if they do, the lending rates will go up, so new investors will come in and put their money in as I said earlier, the code can't be changed either. Constant call. The crypto space we would like to say the code is the law that is not controlled by the government, since the code has access to the code and does not change the uni swap,

 it is one of the major exchanges on the ethereum network and has billions of dollars in pool swaps But you didn't actually win anything, you lost the original 20 you paid as down payment in central finance for margin trading, you usually need to be able to prove your identity while owning at least a few thousand dollars even if you have access to Margin trading, the fee is also well above five percent,

And decentralized finance margin trading can be much faster for anyone in the world with cash and also much safer, so we covered five videos. Large Pillars and Stable Decentralized Finance for Coin Lending and Borrowing Securing Decentralized Exchange and Margin,

 Hopefully by now you can see the added value of decentralized finance and why so many investors are hoarding billions of dollars in this new technology.


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