Have you ever heard about defy before our defy apps, the ultimate killer apps in the crypto space or just new hype? No matter if you’ve never heard about before, or you want to make sure you understand it, right? This video is for you defy or decentralized. Finance is a movement that aims at making a new financial system that is open to everyone and doesn’t require trusting intermediaries like banks to achieve that defy relies heavily on cryptography, blockchain and smart contracts. Smart contracts are the main building blocks on defy. If you don’t know what smart contracts are, or you want to refresh your knowledge, you can pause this video and watch my introduction to smart contracts. Video. First it’s worth noticing that currently most is not pretty much. All of the defy projects are built on the material. The main reason for this is the tombs fairly robust programming language called solidity that allows for writing advanced, smart contracts that can contain all the necessary logic for the defy applications.
Besides that interior has the most developed ecosystem across all the smart contract platforms with thousands of developers, building new applications every day, and the most value locked in smart contracts, which create an additional network effect. In fact, all the defy protocols mentioned in this video are built on the pterygium. Now let’s see how it all started. One of the first projects that started the decentralized finance movement was maker Dao maker. Dao founded in 2015, allows user to lock in collateral, such eat and generate die as stable coin that by using certain incentives follows the price of us dollar die can be also used for saving on makers or easiest platform. This recreates one of the pillars of the financial system lending and borrowing in fact, defy is trying to create the whole new financial ecosystem in a permissionless and open way lending and borrowing is only one part of this ecosystem.
Some of the other important parts are stable coins, decentralized exchanges. There is that is margin trading and insurance. Let’s talk about each of the categories. One by one, besides maker Dao that we just mentioned. There are a few other important projects in this category. The main one is compound compound at the time of creating this video is the biggest defined project in the lending category with around $630 million worth of assets locked in the protocol compound is an algorithmic autonomous interest rate protocol that allows users to supply assets like eater, but zero X or tether and start making interest supplied assets can also act as collateral for borrowing other assets. Another popular defy project in this category is other we’ve clever use of smart contracts and certain incentives. We can create a stable coin that is pegged to the U S dollar without having to store dollars.
In the real world. We already mentioned maker Dao that essentially allows the users to look in their collateral and generate di di is a good example of an algorithmic stable coin besides die. There are multiple other non algorithmic stable coins like USD T U is DC or packs. The main problem with them is the fact that there are centralized as there is a company behind them that is responsible for holding the equivalent of the value of stable coins in us dollar or other assets. Nevertheless, this table coins gained a lot of popularity and are extensively used in different applications like compound or other decentralized exchanges or dexterous in opposite to standard centralized crypto exchanges allow for exchanging crypto assets in a completely decentralized and permissionless way without giving up the custody of the coins. There are two main types of Texas, the liquidity pool based, and the order book based ones.
If you, examples of the liquidity pool based ones are uni swap caber balancer and banker Lupron and IDEX are examples of the order book based ones. Similarly to traditional finals, there is artists are contracts that derive their value from the performance of an underlying asset. The main default application in this space is synthetics, which is a decentralized platform that provides own chain exposure to different assets, margin trading. Also, similarly to traditional finance is the practice of using borrowed funds to increase a position in a certain asset. The main defy apps in the margin trading space are DYI DX and fulcrum insurance is yet another part of traditional finance that can be reproduced in decentralized finance. It’s provides certain guarantees of compensation in return for a payment of a premium. One of the most popular applications of insurance in the defy space is protection against smart contract failures and protection of deposits.
The most popular defy projects in this space are nexus mutual and open. Another really important, although not strictly limited to finance, part of the defy ecosystem are Oracle services that focus on delivering reliable data feeds from the outside world into the smart contracts. The most popular project in this space is chain-link. These are pretty much all the main parts of the defy ecosystem. They can also be combined together in multiple various ways. We can think about them as money Legos, as more complicated defy products can be built on top of the existing blocks. Let’s compare the main differences between defy and CFI that stand for centralized or traditional sinus. But before we do that, if you already made it that far, don’t forget to smash the like button to help this channel grow defy permissionless, no KYC, CFI permission, KYC sanctions defy, open, open source and couraging, free collaboration, CFI, close, close source decisions made behind closed doors.
Defy censorship resistant CFI can be censored, defy, cheaper, mostly network CS CFI, expensive intermediaries charging, hefty fees, defy built on the blockchain CFI built on all foundations. Before we wrap up this video, we have to also mention the potential risks associated with defy. One of the main risks are bags in smart contracts and protocol changes that can affect the existing contracts. We describe them in more details in the previous video about smart contracts. This is also when users can take additional insurance to lower the risk of potential issues. Besides that we always have to check how decentralized a defy project really is. And what is the shutdown procedure is something goes wrong. The someone has an admin key that can be used to shut down the protocol, or maybe there is some on chain governance in place to make such a decision on top of that.
We have to always account for the more systemic risk that can be caused by for example, asset prices, sharply losing their value, which may result in a cascade of liquidations across multiple defy protocols, network fees, and congestion can also be a problem, especially if you want to avoid liquidations. And we are trying to let’s say supply more collateral on time, upcoming interior, 2.0 and second layer scaling solution can help to solve this problem. There’s also a set of more subtle features or changes that apply to one of the protocols may incentivize users to certain non abuse actions that can cascade across multiple protocols. A good example of something like that would be a recent distribution of comp tokens in that compound protocol that costs users to get into seem to be non-profitable high interest borrowing. It was actually profitable due to being rewarded in the additional comp tokens, even though situations like that can be quite dangerous.
They make the whole ecosystem stronger and less vulnerable to similar situations in the future. As you probably already noticed, defy is a super interesting and vibrant space that is full of opportunities. Although we have to remember that this is still a very nascent industry, so it’s a high risk and high reward game. Defy is the closest thing that can actually disrupt the traditional financial industry in opposite to most of the things that companies defy is built on the new rails, instead of relying on the outdated technologies and procedures currently, most of the financial products can be only created by banks. Defy is open permissionless and the neighbor’s cooperative work in a similar way to the internet. Although the fact is currently built predominantly on the interior with more adoption of interoperability protocols. We may see more projects being built on different chains in the future. This was only an introduction to defy in the following videos. We’ll be focusing on each part of the defy ecosystem separately. So stay tuned and subscribe to the channel. If you find this video informative, hit the like button, and don’t forget to subscribe if you’re interested in defy crypto and financial technology. Thanks for watching.