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What is #defi ? Most applications that call themselves "DeFi" are built on top of Ethereum, the world's second-largest cryptocurrency platform, which sets itself apart from the Bitcoin platform in that it's easier to use to build other types of decentralized applications beyond simple transactions. These more complex financial use cases were even highlighted by Ethereum creator Vitalik Buterin back in 2013 in the original Ethereum white paper. That's because of Ethereum's platform for smart contracts – which automatically execute transactions if certain conditions are met – offers much more flexibility. Ethereum programming languages, such as Solidity, are specifically designed for creating and deploying such smart contracts. For example, say a user wants his or her money to be sent to a friend next Tuesday, but only if the temperature climbs above 90 degrees Fahrenheit according to weather.com. Such rules can be written in a smart contract. With smart contracts at the core, dozens of DeFi applications are operating on Ethereum, some of which are explored below. Ethereum 2.0, a coming upgrade to Ethereum's underlying network, could give these apps a boost by chipping away at Ethereum's scalability issues. The most popular types of DeFi applications include: Decentralized exchanges (DEXs): Online exchanges help users exchange currencies for other currencies, whether U.S. dollars for bitcoin or ether for DAI. DEXs are a hot type of exchange, which connects users directly so they can trade cryptocurrencies with one another without trusting an intermediary with their money. Stablecoins: A cryptocurrency that's tied to an asset outside of cryptocurrency (the dollar or euro, for example) to stabilize the price. Lending platforms: These platforms use smart contracts to replace intermediaries such as banks that manage lending in the middle. "Wrapped" bitcoins (WBTC): A way of sending bitcoin to the Ethereum network so the bitcoin can be used directly in Ethereum's DeFi system. WBTCs allow users to earn interest on the bitcoin they lend out via the decentralized lending platforms described above. Prediction markets: Markets for betting on the outcome of future events, such as elections. The goal of DeFi versions of prediction markets is to offer the same functionality but without intermediaries. - In addition to these apps, new DeFi concepts have sprung up around them: Yield farming: For knowledgeable traders who are willing to take on risk, there's yield farming, where users scan through various DeFi tokens in search of opportunities for larger returns. Liquidity mining: When DeFi applications entice users to their platform by giving them free tokens. This has been the buzziest form of yield farming yet. Composability: DeFi apps are open source, meaning the code behind them is public for anyone to view. As such, these apps can be used to "compose" new apps with the code as building blocks. Money legos: Putting the concept "composability" another way, DeFi apps are like Legos, the toy blocks children click together to construct buildings, vehicles and so on. DeFi apps can be similarly snapped together like "money legos" to build new financial products. What Are the Components of DeFi? At a broad level, the components of DeFi are the same as those for existing financial ecosystems, meaning they require stable currencies and a wide variety of use cases. DeFi components take the form of stablecoins and services like crypto exchanges and lending services. Smart contracts provide the framework for the functioning of DeFi apps because they encode the terms and activities necessary for the functioning of these services. For example, a smart contract code has a specific code that establishes the exact terms and conditions of a loan between individuals. If certain terms or conditions are not met, collateral could be liquidated. All of this is conducted through specific code rather than manually by a bank or other institution. All components of a decentralized finance system belong to a software stack. Each layer’s components are meant to perform a specific function in the building of a DeFi system. Composability is a defining characteristic of the stack because the components belonging to each layer can be composed together to fashion a DeFi app. - The four layers of the DeFi stack Settlement Layer: The settlement layer is also referred to as Layer 0 because it is the base layer upon which other DeFi transactions are built. It consists of a public blockchain and its native digital currency or cryptocurrency. Transactions occurring on DeFi apps are settled using this currency, which may or may not be traded in public markets. One example of the settlement layer is Ethereum and its native token ether (ETH), which is traded at crypto exchanges. The settlement layer can also have tokenized versions of assets, such as the U.S. dollar, or tokens that are digital representations of real-world assets. For example, a real estate token might represent ownership of a parcel of land. Protocol Layer: Software protocols are standards and rules written to govern specific tasks or activities. In parallel with real-world institutions, this would be a set of principles and rules that all participants in a given industry have agreed to follow as a prerequisite to operating in the industry. DeFi protocols are interoperable, meaning they can be used by multiple entities at the same time to build a service or an app. The protocol layer provides liquidity to the DeFi ecosystem. One example of a DeFi protocol is Synthetix, a derivatives trading protocol on Ethereum. It is used to create synthetic versions of real-world assets. Application Layer: As the name indicates, the application layer is where consumer-facing applications reside. These applications abstract underlying protocols into simple consumer-focused services. Most common applications in the cryptocurrency ecosystem, such as decentralized cryptocurrency exchanges and lending services, reside on this layer. Aggregation Layer: The aggregation layer consists of aggregators who connect various applications from the previous layer to provide a service to investors. For example, they might enable the seamless transfer of money between different financial instruments to maximize returns. In a physical setup, such trading actions would entail considerable paperwork and coordination. But a technology-based framework should smoothen the investing rails, allowing traders to switch between different services quickly. Lending and borrowing is an example of a service that exists on the aggregation layer. Banking services and crypto wallets are other examples. Sources - https://ethereum.org/en/ - https://www.investopedia.com/#unbankyourself Not financial advice. DYOR. DCA. BTD. HODL. #crypto #cryptocurrency #crypocurrencies #cryptoaddict #cryptoalert #cryptobeliever #bitcoin #ethereum #cardano #public #publiccommunity #dyor #longterm #growth #learningtoinvest #feedyourbrain #learning #learningaboutcrypto #possibilities #newinvestor #tech #technology . . .
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