Defi Technology Trends To Keep An Eye On
Blockchain Bridges
Blockchain bridges are a vital part of the cryptocurrency ecosystem, connecting different chains. They monitor both networks simultaneously and "pick up" the tokens in one network and "issue" them in the other. The teams behind blockchain bridge projects have a deep understanding of this technology, with world-class fintech and cloud engineering backgrounds. The teams can combine consulting, design, and engineering at scale.
Before, only one chain can exchange assets from one with another. Hence, it was not possible to use ETH in Solana Dapps without transferring it through exchanges. A cross-chain bridge, on the other hand, provides this interoperability. The WBTC bridge is the largest blockchain bridge, with over $12 billion in TVL. However, hardline decentralization advocates may argue that WBTC is less secure than decentralized bridges. However, there are several other benefits of bridging assets.
Blockchain bridges allow users to use tokens on different networks without switching platforms. This is particularly useful for projects with only a six-month history. They can also facilitate better gaming and eCommerce experience. Blockchain bridges are an important component of the cryptocurrency ecosystem, as they allow users to access the benefits of different networks without sacrificing liquidity, network effect, and other features. Furthermore, they encourage innovation across ecosystems.
While blockchain bridges are relatively new and still in their early stages, they have the potential to drive innovation within the ecosystem. However, they also come with risks, so teams need to carefully choose their implementation. A recent hack of the Poly Network demonstrated the importance of security over time to market. For this reason, developers need to design bridges with security in mind. With that said, a homogeneous bridge would be ideal. However, bridges are not yet fully developed and are subject to exploits and hacks.
Self-Repaying Loans
Digital money opens up new avenues for innovation and use cases. Self-repaying loans are one such innovative new concept emerging in DeFi technology. In the traditional finance industry, loans are often made using collateral. In DeFi technology, self-repaying loans can be made without collateral and repaid in the same blockchain transaction. This enables peer-to-peer transactions that were previously unthinkable.
Another benefit of the self-repaying loan model is that interest from the collateral is used to repay the loan. The collateral that the borrower deposits is returned to the borrower after the loan is repaid. While this method avoids liquidation, depreciation will increase the time to repay the loan. But while this is a boon for the economy, it also comes with a risk.
The Alchemix team recently detailed plans for their v2 platform, representing a significant protocol upgrade and self-repaying loans. In addition, the team detailed the revamping of the platform, new collateral types, yield-bearing strategies, and collateral utility. Currently, Alchemix is the 37th most popular DeFi protocol with more than $1 billion in locked value. But its current price suggests that it may be long before it reaches its potential.
The Alchemix platform, for example, offers a self-repaying loan model, wherein users deposit crypto assets as collateral and borrow against them. The future yield of these crypto-assets then pays off the debt. Thus, the Alchemix system is one of the most promising applications of DeFi technology. Further, it may even allow time travel. If Alchemix is successful, it could also be a game-changer in the field of finance.
Smart-Contract Technology & Artificial Securities
There is an extraordinary level of interest in open financial engineering that DeFi technology can facilitate. However, this emerging technology poses some risks. While DeFi is not widely in use yet, its value recently crossed the 10 billion USD mark. These value estimates relate to the reserves locked into smart contracts and are available for various purposes. DeFi technology may be a game-changer for our current monetary system if a successful deployment occurs.
One application of DeFi is the ability to issue collateralized debt positions using crypto assets. These debt positions enable the issue of new tokens, with the number varying according to the collateralization ratio and token target price. These new tokens work similarly to traditional savings accounts, with higher interest rates. It is possible to monitor interest in real-time and can get payout daily, weekly, or monthly.
Smart contracts can lead to countless new applications and ecosystems, but a key issue is determining how these new technology trends will affect the financial industry. It's also important to keep an eye on regulatory changes, as these innovations will require revisions to existing laws.
What To Look Out For
There are many advantages of DeFi, but what should you look out for? With DeFi, there is no need for a government-issued ID or social security number. Instead, all the information needed to make a transaction is stored on a blockchain and monitored by smart contracts.
Among the common risks in DeFi projects are fatal code flaws, URL hacks, and smart contracts. "Rug pulls" occur when a project masquerades as decentralized or open-source but in reality becomes one entity taking advantage of all of its users' funds. To avoid being a victim of a "rug pull," carefully research DeFi projects before investing. Make sure to check the company website for any news regarding possible protocol hacks.
A big concern with DeFi is the governance model. DeFi is a form of direct democracy with a decentralized decision-making process. At its onset, a single person may be running a DeFi application, but as momentum builds, the individual may want to step aside from the project and hand over control. A good way to avoid this situation is to look for a company with a centralized leadership structure.
DeFi offers several benefits, including privacy and accessibility. Traditional lending requires lenders to know the borrower's identity to assess their ability to repay the loan. DeFi doesn't require a lender to know the borrower's identity, preserving privacy and mutual trust. The benefits of DeFi are not limited to privacy, but they may be worth considering for your finances. So, what are you waiting for? Start using DeFi today!