Decentralised finance, better known as DeFi, is a blockchain-based form of finance that uses smart contracts on blockchains instead of relying on central financing intermediaries like banks, exchanges and brokerages. DeFi includes a variety of financial applications in the cryptocurrency and blockchain market that aim to disrupt financial intermediaries.
DeFi is attracting massive attention in the cryptocurrency industry. The total value of DeFi contracts skyrocketed over the past few years with a rise from US$2.1 million in late 2017 to nearly US$7 billion at the start of 2020. Approximately US$20.5 billion has been invested in DeFi as of January 2021. Here is a quick guide to understanding how DeFi works and how it can be purchased in Singapore via the Bitget exchange.
How does DeFi work?
Decentralised finance operates without a central exchange, and instead uses smart contract programs which are run via open-source software by a hub of developers and programmers. Decentralised applications, or DApps, are central in the operation of DeFi. DApps are used to perform financial functions on blockchains, enabling transactions to be made directly between users and mediated by smart contract programs. DApps allow participants to interact directly with blockchains like Bitcoin and Ethereum online.
Through DeFi platforms, cryptocurrency traders can lend or borrow funds from each other, earn interest, insure against risks and use derivatives to bet on price movements. DeFi operates on a peer-to-peer basis without any company or institution involvement. Users can also employ DeFi to purchase cryptocurrencies as stablecoins, and to participate in a lottery on PoolTogether, where each investor earns back the money they invested and one person wins big by pocketing all the interest accrued in the pool.
Bitcoin and Ethereum are the two original DeFi applications, with Ethereum being the most commonly used. Ethereum is the second-largest cryptocurrency by market capitalisation after Bitcoin, and the most actively used blockchain. Both Bitcoin and Ethereum are controlled by computer networks as opposed to central authorities.
Newer applications like Dai, Compound and Dharma are quickly rising to overtake the DeFi market. Dai is a stablecoin, a Bitcoin-like digital token that cannot be accessed by central banks. The value of Dai is tied to the American dollar, which decreases the volatility that impacts the practicality of Bitcoin as a currency for day-to-day use. Compound enables users to earn interest by operating as a crypto version of a market fund, while Dharma allows participants to issue and underwrite debt to win investment returns.
Numerous tradeable tokens used for DeFi smart contracts have increased in value by 3-4 times per year and more. The Synthetix Network Token, for one, has risen more than 20-fold while Aave has increased nearly 200-fold.
Yield farming is one of various DeFi concepts that have emerged in addition to new applications such as decentralised exchanges, stablecoins, lending platforms, wrapped Bitcoins and prediction markets. Yield farming comes with a higher risk, enabling users to scan through DeFi tokens to search for opportunities with larger returns. Liquidity mining is a form of yield mining where DeFi applications lure users to their platform with complimentary tokens.
DeFi apps are open-source with code that can be viewed by anyone in the public domain. As a result, these applications can be employed to compose new apps by using the code as building blocks. Similarly, these applications can be stacked together to build new financial products. Cryptocurrency investors can buy stablecoins such as Dai and lend them on Compound to earn interest.
The future of DeFi
Several high-street financial institutions are increasingly accepting and participating in DeFi and other blockchain technologies. As the cryptocurrency market grows and the functions of DApps expand, DeFi platforms may potentially be used in the future to make transactions such as buying property under a mortgage. The deed to such investments would be put on a blockchain ledger as collateral in the form of a token. This innovation would significantly simplify big transactions such as buying a house since no external parties like a lawyer or financial institution would be necessary.
The coronavirus pandemic has led to a major decrease in global interest rates. Consequently, DeFi can offer higher returns than high-street institutions. Since DeFi only requires the use of a smartphone, it is accessible even to people without a bank account. This is making way for a more decentralised financial system in the future with the challenge of minimising risks of fraud.
How to buy DeFi cryptocurrencies in Singapore
DeFi cryptocurrencies can be purchased in Singapore by making use of a cryptocurrency exchange. Ethereum-based lending apps can generate passive income for users by loaning their money and earning interest. Similarly, practices such as yield farming can generate major returns, although it comes at a higher risk.
Bitget is an exchange in Singapore where users can buy DeFi cryptocurrencies through mobile or desktop applications. Among the more than one million registered users across the world, Bitget ranks in the global top 5 with its daily average contract trading volume. Bitget is currently valued at US$1 billion, with talents and attainments in international cryptography, financial investment, social media, electronic games and other fields.
Bitget is a global leading cryptocurrency derivatives exchange headquartered in Singapore. Begin your cryptocurrency trading with Bitget today and trade from anywhere in the world.
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