Up till now probably most of you who are in Crypto already know what is DeFi or have heard about it. DeFi is decentralized finance, it is tradition finance put on block chain. DeFi gained a lot of momentum in 2019, more and more funds are been used for it. Ethereum seems to be the most popular platform. In tradition finance usually there is some kind of middle man. For example if you want a loan ,bank is your middle man to get one. In DeFi world your middle man is smart contract. Which will execute the features which are built in smart contract.
I have been talking about this few month ago, that i love Maker DAI stable coin which is decentralized on ethereum block chain. So it is in simple words CDP (collateralize dept position), where you lock up your Ethereum to receive DAI stable coin. So you can say that DAI token is backed up by real assets. New DAI are minted as more assets are locked up, currently in circulation there is 86 million DAI. Current most of the use cases for DAI are from traders, to leverage trading Ehtereum. For example you can buy Ethereum then lockup into smart contract to get DAI, that DAI use for purchase more Ethereum and so on. This way you can long Ethereum with leverage.
With DAI all the DeFi kicked of and there is more and more platforms built every month. Best website to check is https://defipulse.com/ where you can track projects by their popularity.
Im not going to go trough all of them now, just the one currently i see most interesting. So the total value of assets locked up in these projects are 530 million usd and it is growing every day. So in in DeFi world you can Lend Crypto, borrow, leverage trading like dydx exchange where you can long or short eth against DAI, also decentralized asset exchange and payments.
The project what i want to talk about today is compound.finance , which is basically lending borrowing platform. There is 2 things you can do, you can lock up you assets to get more assets which is called Collateralize dept position. As a example i can give you, you want to buy mining rigs. And you have ethereum in your account ,but you don’t want to exchange it to your local currency cause you think value is quite low. You can now take a loan on based of your ethereum stack, use it for buying mining rigs, and from mining rigs profits payoff your debt position. At the en you will have your etherum and mining rigs. This is just one of the samples. There is many use cases and many of which are used in current financial world also with centralized collateralize dept.
And the other thing what you can do on Compound finance is lending and ear interest rate on your assets. The interest rates are quite attractive if you look at them. Probably the best interest rates are on stable coins like DAI, currently at 7.4% yearly which are paid out by every new block found. Where i don’t know any bank who will give you 7% on your investment accounts. This interest rate is fluctuating on depending how many DAI is borrowed from the total pool . At the moment of this post:
- total gross supply of the pool is 37.5 million DAI
- Gross borrow is 23.5 million DAI
This is not financial advice , but for testing these instruments im lending out 1000 DAI. Which is bringing me interest in DAI every few seconds as new Ethereum block crated. Currently 75 usd yearly, i know it doesnt look much. But look if you have 100k DAI it is 7500 yearly and so on.
It is still very risky as smart contracts haven’t grown enough and there could be human errors where your funds could get lost. Like we have seen in past, with DAO hack in 2016. Basically a hacker found volubility in smart contract and drained over 3 million ethereum from it. which made ethereum split in 2 chains ETH and ETC. Also i did invest in this project, but if wast that significant amount, and anyways the funds where returned by hardfork.
If you havent heard about DeFi yet, i would suggest you to start with Maker DAO. Which is the biggest sample that decentralized finance works and we dont need banks anymore. We can start trusting smart contracts. It does have already more then 2million ETH locked up as collateralize dept. This is already 1% of eth locked up in smart contract, think about it whats going to happen to ethereum price when this gains more popularity.