Cryptocurrency has proved to have some advantages over traditional financial system which includes its DeFi applications.
DeFi is the short form of decentralized finance which is a trustless application that is built on cryptocurrencies. Being a trustless application means that it is not controlled by a central authority just like cryptocurrencies.
Crypto elements such as cryptography, blockchain technology, and smart contracts are all important in the running of DeFi. These have made it to be one of the several reasons Crypto is predicted to be here to stay.
Crypto lending and borrowing are made easier than the traditional system due to the DeFi application.
In this post, we’ll open you to several things you might not know about DeFi crypto. If you’re a crypto beginner or veteran, this will guide you on how to make the best out of your. investment Let’s get right into it.
Top Things You Need to About DeFi Crypto
There are several things you might have not known about the decentralized finance in crypto. This makes it a good option than the traditional finance. Discussed below are things you need to know about DeFi Crypto.
1. Ethereum (ETH) is the Crypto to Run DeFi Applications
The DeFi ecosystem is run on Vitalik Buterin’s Ethereum network. The network’s robust smart contact contract programming makes it a good option for DeFi.
Ethereum which was created to be better than Bitcoin has the largest network. It was designed to have blockchain applications run on top of its code.
Ethereum is the first crypto project that was used to create DeFi. In recent times, other cryptocurrencies are now running DeFi on their platforms too. Some of these cryptocurrencies include Terra, Avalanche, and so on.
2. MakerDAO opened ways for DeFi
The first project to be created from DeFi is MakerDAO which paved for others. MakerDAO was created in 2015 on the Ethereum network.
MakerDAO brought the DeFi ecosystem into limelight as users can lock their ether through the smart contracts to generate another crypto, Dai (a stablecoin). This crypto asset generated is used on the MakerDAO platform. This make it possible for users to lend and borrow on the platform via the power of stablecoins and smart contracts.
Other DeFi projects created after MakerDAO include Aave, Compound, etc.
3. Yields in Decentralized Finance (DeFi) is Higher Than Traditional Finance
One of the advantages crypto have over the traditional finance is the higher yield provided by DeFi platforms in lending & borrowing.
This is possible because the cost of running a smart contract is much more cost effective than that of traditional finance. Yield generated from lending money is passed to the lender directly with little interest rate compared to that of banks.
With this, many people in the world that are opened to this prefer to use this option when borrowing/lending than the traditional financial system.
4. Lending & Borrowing Hallmark of DeFi Application
Although DeFi is useful in several ways, its use for borrowing and lending on platforms has been the most useful.
Building a robust DeFi crypto portfolio has therefore been a good option for investors. DeFi crypto such as COMP, the native token of the Compound protocol is a good one. As of writing, there are $8.9 billion locked into Compound smart contract.
This locked tokens can be used to borrow against crypto positions such as ETH and stablecoins which holders can spend with. This is also an option to earn passive income as long as assets are locked into the protocol.
5. Earn Passive Income Via Flash Loans
There are several means of earning passive income in crypto with DeFi ecosystem also making this possible.
Crypto lending and borrowing are certainly among the top passive income strategies. Flash loans is another like it that is made possible by the Aave platform. Here, a user borrows and repays a loan in the same block. Earning passive income with flash loans is made possible by arbitrage and quick trading.
Arbitrage is an option to make profit through the differences in price on crypto exchanges. For example, a user can buy a crypto asset for $500 by calling on smart contract and then sell to one that sell for $1,000. With this, the borrower can pay back the loan of $500 then pocket the other $500 gain.
DeFi hasn’t stopped in its move to create an entirely new financial system better than the traditional financial system.
Developers around the world as well as investors are already making this possible. You don’t have to be left out of its benefits and get used to its features as crypto get more foothold in our world.