DeFi: A Subsector of Web3
Likewise, it is very capable of making the Internet more equitable and out of control of tech giants like Google, Meta, etc. As a result, DeFi is rapidly establishing itself as a new paradigm. Which enables new types of value and utility that were not previously available in the old financial system.
Handling funds in a crypto wallet in a non-custodian way is the beginning of restricting control of third parties over one's personal assets. This change is influenced by the global financial crisis of 2008-09 that led to the demise of companies like Lehman Brothers.
Web3 and DeFi enthusiasts are quite optimistic that this paradigm will end the "big fail" strategies countries use to protect those institutions. Those who unfairly play with public money and put the global financial system at risk.
In this article, let's understand the critical components of Defi that paved the way for Web3.
Key Defi solutions opening doors for web3
Various Defi solutions that open the door for web3 include decentralized exchanges (DeXs), lending, borrowing, staking, synthetic assets, stable coins, and nonfungible tokens (NFTs), as explained below-
1. Decentralized exchanges
A DeX is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. Defi systems, unlike centralized exchanges (CEXs), are non-custodial, which means that the user retains possession of their private keys while transacting.
DEXs use smart contracts to self-execute under predetermined conditions and record each transaction on the blockchain, and without a central authority.
Uniswap with a market share of 0.0019%, dydX with a market share of 0.0013%, and PancakeSwap (V2) with a market share of 0.009% are the three largest DeXes in the crypto space, according to Coinmarketcap.com.
2. Decentralized money markets (lending, borrowing, staking)
Defi platforms are most commonly used in multi-purpose P2P money markets that offer a variety of products and services. For example, users can borrow, lend, and stake crypto assets through decentralized money markets, which provide liquidity to the protocol through various sorts of collectivized liquidity pools (LPs).
More techniques for capital deployment and investment are being realized on a daily basis, which is causing the Defi lending market to evolve.
Staking pools like Cardano staking pools are available on blockchains that use the Proof-of-Stake (PoS) architecture or consensus method, and they require stakeholders to lock their crypto tokens in a specific blockchain address i.e., a wallet in exchange for an Annual Percentage Yield (APY).
These locked tokens are tied to the development of the particular blockchain. And in exchange, the blockchain pays stakeholders a percentage reward based on the number of tokens invested through the stake pool operator.
To become an independent validator on Ethereum 2.0, an investor would need 32 ETH tokens, but joining a staking pool for a fraction of the tokens required otherwise is feasible.
3. Synthetic Assets
Bonds, commodities (such as gold and silver), indexes, stocks (equities), fiat currencies, and interest rates can all be created using synthetic assets, which are blockchain-based tokenized assets that resemble real-world assets.
Synthetix is an Ethereum-based token trading platform that allows users to trade ERC-20 tokenized representations and derivatives of cryptocurrencies, currencies, equities, precious metals, and other assets. Synthetix's dual-token strategy does this by requiring users to stake the platform's main token, Synthetix Network Tokens (SNX), as collateral in order to produce new synthetic assets.
4. Stablecoins
Stablecoins are assets that are either pegged to a fiat currency like the US dollar (fiat-backed stable coins such as Tether), cryptocurrency (crypto-backed stable coins such as wBTC), or algorithmic stable coins such as DAI.
Dollar stable coins allow investors to earn a return on their crypto assets while avoiding the negative impacts of market volatility in the Defi market. If NFTs are the entrance points for consumers to enter Web3, stable coins should serve the same role for businesses, says Bradley Riss, CCO at Checkout.com.
5. Nonfungible tokens
While NFTs appear to be widely known among creators, they are still in their early stages, with a high entry barrier. For example, NFT marketplaces (such as Opensea), Web3 cryptocurrency wallets (such as Metamask), and NFT marketing must all be learned by creators to shine in the web3 world.
For artists with a great understanding of technology, this may not be a problem, but it is a huge challenge for the average social media influencer who is not aware of the use cases of NFTs beyond art. Creators can leverage NFTs in the following ways to be a part of web3:
Disclaimer:
This material should not be construed as a recommendation for any particular cryptocurrency. It is not a trading recommendation. The cryptocurrency market is full of unexpected twists and overvalued assets. Before you buy something, do some research. Don't put more money into it than you can afford to lose.