In the wake of the 2008 financial crisis, many people lost faith in the traditional banking system. Centralized banks had made a series of poor decisions that led to the collapse of the housing market and widespread job loss. In response, a new financial movement began to emerge: decentralized finance, or DeFi. This movement was based on the idea of decentralization – the elimination of central points of control.
Bitcoin was one of the first applications of this new movement. Bitcoin is a digital currency that is not controlled by any government or financial institution. Instead, a decentralized network of computers, that anyone can join, manages it collectively. The anonymous Satoshi Nakamoto created Bitcoin, explicitly as a currency that central banks could not manipulate.
In 2009 Satoshi Nakamoto released a white paper for Bitcoin. In this paper, Nakamoto proposed a “peer-to-peer electronic cash system” that allows users to send online payments directly from one party to another without needing a third party, such as a bank or financial institution. This was a radical idea at the time and would lay the foundations for all of DeFi.
Bitcoin was not the only innovation to come out of the 2009 white paper. Nakamoto also introduced blockchain technology, a distributed ledger system that records and verifies transactions. Blockchain provides a secure way to store data in a decentralized manner, which is essential for DeFi applications.
Since then, the DeFi movement has grown exponentially. Now dozens of applications allow users to do everything from lending and borrowing money to earning interest on their digital assets. DeFi is still in its early stages, but it has the potential to revolutionize the financial system as we know it.
Ethereum and the rise of smart contracts
Ethereum is one of the most popular platforms. Unlike Bitcoin, which is primarily a digital currency, Ethereum is a decentralized platform that runs smart contracts. These contracts are applications that run exactly as programmed without any possibility of fraud or third-party interference.
Ethereum was first proposed in 2013 by Vitalik Buterin, a Russian-Canadian programmer. He envisioned it as a way to create decentralized applications (dApps) that would be more efficient and secure than those running on centralized servers. To do this, he proposed the use of smart contracts.
Smart contracts are pieces of code that can automatically execute transactions when certain conditions are met.
For example, let’s say you wanted to buy a house. In the traditional system, you would have to go through a real estate agent, who would then contact the seller.
Once you agree on a price, you would have to go to a bank and apply for a mortgage. The bank would then send an appraiser to assess the value of the property before approving the loan. Finally, once everything was approved, you would sign the contract and transfer the money to the seller.
The process is long, complicated, and expensive. With smart contracts, however, you could automate all of these steps so that they happen seamlessly and without any middlemen. You could specify in the contract that as soon as you send the money, ownership of the property will be transferred to you automatically.
Not only does this make transactions more efficient, but it also makes them more secure since there is no longer any need for third-party intermediaries who could potentially introduce errors or fraud into the system.
Ethereum’s popularity has grown exponentially since its launch in 2015. It is now used by some of the world’s largest organizations including Microsoft, JPMorgan Chase, and Deloitte. Ethereum is also being used to develop new types of applications such as decentralized exchanges (DEXs), non-fungible tokens (NFTs), and synthetic assets.
The Rise Of Stablecoins
A stablecoin is a digital asset whose value is pegged to that of a real-world asset, such as the US Dollar or Gold. The advantage of a stablecoin is that it allows users to hold cryptocurrency and engage in DeFi without worrying about the volatility of the market.
There are three main types of stablecoins: those that are collateralized, those that are backed by fiat currencies, and those that are algorithmic.
The first type of stablecoin is over collateralized. This means that the coin is backed by another asset, such as Bitcoin (BTC) or Ethereum (ETH). The most popular collateralized stablecoin is Maker’s DAI, which was launched in 2017. DAI is pegged to the US Dollar and is backed by BTC and ETH.
Another popular collateralized stablecoin is USDC, which was launched in 2018. USDC is also pegged to the US Dollar but is only backed by BTC. USDC is managed by Circle, a Boston-based crypto startup.
Backed by Fiat Currencies
The second type of stablecoin is backed by fiat currencies. Real-world currencies, such as USD or EUR, back the value of these coins. The most popular fiat-backed stablecoin is Tether (USDT), which launched in 2015. USDT is pegged to the US Dollar and backed by reserves of USD held in a 1:1 ratio by Tether Limited.
The third type of stablecoin is algorithmic. This means that the coin’s value is not pegged to any real-world asset but instead fluctuates based on algorithms. One example of an algorithmic stablecoin is Terra (LUNA), which launched in 2019. Terra’s price fluctuates based on the demand for goods and services on the Terra network. Ultimately, Terra and their UST algorithm was not stable enough to keep their coin at the required value. In May 2022, the token plunged in price and the episode dealt DeFi a painful blow.
AAVE Money Market Basics
In the world of cryptocurrency, money markets are a relatively new phenomenon. A money market is a platform that allows users to supply or borrow specific tokens. This can be done through lending platforms like AAVE or Compound, which offer Flash Loans (borrow unlimited amount within a block tx). ETHLend was the first lending platform that allowed users to supply or borrow specific tokens.
So, what are the benefits of using a money market? For one, anyone can be a lender. This means that users can earn interest on their holdings by lending them out to others.
Additionally, money markets offer a great deal of flexibility when it comes to borrowing and lending. Borrowers can choose from a variety of loan terms and repayment schedules, while lenders can customize their investment portfolios to suit their needs and risk tolerance levels.
A money market may be right for you if you’re looking for a way to earn interest on your cryptocurrency holdings. Money markets offer a great deal of flexibility and opportunity for both lenders and borrowers. They also help with hedging which means you may supply one cryptocurrency and borrow another one, thus not losing the initial cryptocurrency position, since you can buy it back with the asset you borrowed. So if you’re considering investing in a money market, be sure to do your research and choose a platform that best suits your needs.
The First Decentralized Exchange
There are two main types of exchanges: centralized and decentralized. Centralized exchanges are the most common and work similarly to traditional stock exchanges. However, decentralized exchanges (DEXs) come with a number of advantages.
A decentralized exchange is a digital asset exchange that does not rely on a third party to hold user funds. Instead, users execute trades directly through a blockchain, peer-to-peer. This makes DEXs much less vulnerable to hacks and other security breaches that have plagued centralized exchanges in recent years.
DEXs use smart contracts to facilitate trades between users. A smart contract is a piece of code that is stored on a blockchain and automatically executes when certain conditions are met.
For example, let’s say Alice wants to trade her Ethereum for Bob’s Bitcoin. They can use a smart contract that will automatically transfer the Ethereum from Alice’s wallet to Bob’s wallet once the Bitcoin has been transferred from Bob’s wallet to Alice’s wallet. This type of trustless trade is only possible on a DEX because it relies on the immutable nature of blockchain technology.
Decentralized exchanges offer a number of advantages over their centralized counterparts, including increased security, transparency, and affordability. However, they also come with some trade-offs. For example, DEXs often have lower liquidity than centralized exchanges and can be more difficult to use for newcomers to the crypto space. This often means DeFi in general is an “experts-only” industry.
The Birth of Uniswap
In mid-November 2018, Hayden Adams launched Uniswap on Ethereum mainnet. Built on top of the Ethereum blockchain, Uniswap is a DEX that allows users to swap between ETH and ERC20 tokens. Using the decentralized power of smart contracts, Uniswap provides a trustless, permissionless platform for exchanging cryptocurrency. It opens DeFi up inter-network trading.
Uniswap’s launch coincided with the release of the ERC20 token standard, which meant that there were now thousands of ERC20 tokens available for trading on Ethereum. However, there was no easy way to trade these tokens without going through a centralized exchange (CEX). This is where Uniswap came in; by allowing users to trade directly from their wallets, Uniswap made it possible to trade any ERC20 token without having to go through a CEX.
Uniswap V2: Introducing Token-to-Token Swaps
In May 2020, Hayden Adams launched Uniswap V2 on Ethereum mainnet. Building on the success of the original version of Uniswap, V2 allowed users to swap between ERC20 and ERC20 tokens for the first time.
One of the most significant changes in Uniswap V2 was the introduction of Automated Market Maker (AMM). In the original version of Uniswap, there was only one pool per currency pair; in Uniswap V2, there are multiple AMM pools per currency pair, each with its own liquidity pool (LP). This change helped increase the platform’s liquidity and made it easier for users to find the best prices when swapping between tokens.
Uniswap V3: Making Swaps More Capital Efficient
In November 2020, just six months after the launch of Uniswap V2, Adams unveiled yet another major upgrade to the platform: Uniswap V3. The most significant change in this latest version of Uniswap is the introduction of Tick Ranges, which makes swaps more capital efficient by only providing liquidity in certain ranges.
Another key change in Uniswap V3 is the introduction of multiple price oracles. In previous versions of Uniswap, there was only one price oracle per currency pair; in Uniswap V3, there are multiple price oracles per currency pair, each with its own weighting system. This change helps to ensure that prices are more accurate and that trades are executed more quickly and efficiently.
DeFi is changing our views on traditional finance
We’ve looked at a few ways blockchain technology is changing how we think about money. Bitcoin has established itself as a store of value. Ethereum provides the infrastructure for decentralized applications, stablecoins offer an on-chain alternative to fiat currency, and money markets allow users to easily borrow and lend cryptocurrencies.
We explored DEXs, or decentralized exchanges, which allow users to exchange tokens for one another without relying on a third party. These are just a few of the ways that blockchain is changing how we think about money.
There are sure to be many more interesting DeFi developments in the years to come. What do you think will be the next big development in the world of blockchain-based money?