DeFi Led Sentiments Keep Bitcoin Afloat

5 min read | September 21, 2020 07:05 PM AEST | By Team Kalkine Media

What is DeFi?

DeFi is short for decentralized finance – an umbrella term used for cryptocurrencies or blockchain geared to pin down financial intermediaries, which at present, acts as a spine for every financial transaction across the globe.

DeFi draws inspiration from the blockchain technology, which allows several entities to hold a copy of the history of transaction or say maintain a public ledger; thus, limiting the power of financial intermediaries over the financial transaction or a central source.

The heightened traction around DeFi could be inferred from the performance of UNI token, which post launch on 16 September 2020 has doubled in value.
UNI token was issued by Uniswap, which is already the number one DeFi project.

How Ethereum, Blockchain, and DeFi Applications Shaping the Future Market?

Ethereum – a blockchain-based DeFi platform is now attracting many DeFi application. Most applications that call themselves DeFi such as payments networks like Flexa, XDai, Connext and DeFi-based lending or borrowing protocols such as Aave, Maker, Compound, C.R.E.A.M Finance, InstaDApp, are built on Ethereum.

The increasing number of DeFi application on Ethereum platform is primarily due to its smart contracts, i.e., protocols that auto initiate conditional transactions or protocols that automatically execute transactions if certain conditions are met.
Such protocols and smart features of initiating a transaction on meeting pre-determined conditions inches up the flexibility of the Ethereum platform, making it suitable for the development of DeFi-based applications.

While Ethereum might be the torchbearer of growing DeFi-based applications, blockchain still has weightage, as Ethereum itself is built on the blockchain, which is the forerunner of the decentralized financial system.

DeFi Applications

Decentralized Exchanges (DEXs)

Atomex, AirSwap, and many other such exchanges are the leading examples of DeFi application of creating a decentralized exchange, which assists users to exchange currencies by connecting them directly with each other, eliminating the role of an intermediary for a financial transaction.

Stablecoins

One of the main backlashes that cryptocurrency markets had faced is the issue of usage as a currency with no physical backing or collateral, leading to more news-based fluctuations and market volatility in digital currencies as compared to fiat.

With the vast growing application of DeFi-based Stablecoins, which are usually backed with some collateral or fiat currencies such as the U.S. dollar or euro, the DeFi-system is stemming out and gaining market traction, which in a cascade is providing stability to digital currencies.

Lending Platform

Lending markets are one of the most popular forms of DeFi with many platforms such as Aave, Maker, Compound, C.R.E.A.M Finance, gaining considerable market traction by connecting borrowers to lenders of cryptocurrencies. Also, many platforms such as Compound derive interest rate of borrowing or lending purely on the demand and supply curve, eliminating commission, processing, and several other sunk cost of the lending activities outside the crypto market.

Also, many platforms are further making the environment more secure by keeping the lending collateral-based.

Moreover, in such a lending environment, an individual neither gives out identity or associated credit score to secure a loan; thus, it eliminates many financial intermediaries in the process.

Apart from a wide range of applications of DeFi providing stability to the crypto market, the emerging concepts around DeFi are also providing cushion to digital currencies.

Emerging Concepts of DeFi

Yield Farming

Broadly speaking, yield farming could be defined as any effort or use of crypto assets to generate returns apart from the normal capital gain or loss. Investors could ideally move their crypto assets to lending platforms like Compound in order to generate some extra returns.

Liquidity Farming

Liquidity farming is the subordinate to the yield farming, where DeFi applications entice users to their respective platforms by providing them free tokens, which could be further utilised by putting them into the APY pool and generate higher returns.

In a nutshell, DeFi applications are bringing skin into the game with many platforms leading to higher adaptation and acceptability of the blockchain technology. The higher acceptance and emerging platforms are now changing the perspective of the general public around digital currencies, providing the crypto market unprecedented stability.

The same could be inferred by tracking the BitMex Bitcoin Volatility Index (or BVOL), which has been trending downward for quite some time; however, with certain outliers in between, suggesting that the general risk around the crypto space is getting lower, but the risk of whiplash over events is as high as it was at the beginning of the bitcoin trading.

Thus, Ethereum, Blockchain, and DeFi applications are bringing in a new dimension to the crypto space.

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