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Bitcoin DeFi: What the Future of Finance Really Looks Like

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A bright option for the future of finance may be upon us, and despite teething problems, interest is piqued. 

Decentralized Finance, or DeFi, is the crypto space’s latest buzzwords, however in contrast to the largely useless buzz tokens of 2017, DeFi actually offers the promise of usable systems and genuine business prospects. The epic bubble and bust of crypto in 2017 left many investors with a bad taste in their mouths and a bag full of useless tokens. With interest in crypto surging, many ICOs took advantage of the large number of novice investors, creating enormous ICOs filled with promises not meant to be kept. 

While this bubble and bust season of 2017 set a grim outlook for many, cryptocurrency adoption still remained strong, leading to the massive rally we saw in May, when crypto markets quickly overtook traditional in vitality. Despite the love lost experienced in 2017, most investors chose to get savvy rather than bitter, turning to exchange platforms like Bitvavo– specialty spaces designed to help investors better navigate the crypto markets. Allowing users not to be deterred by the bubbling prices of the DeFi space, but instead look upon the early days of the industry as an enticing investment potential. 

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What is Decentralized Finance? 

Much like the IPOs of Google, Microsoft, IBM, and Bitcoin itself, getting in on the ground floor of groundbreaking business is every investor’s dream. Buying in at pennies and cashing out in pounds- or dollars as the case may be. However, unlike bitcoin, the other IPOs mentioned took decades for investors to see any real promise from holding on to the assets in their vaults. In 2017, a mere 8 years after the advent of bitcoin, prices went nuclear and millionaires were made overnight. The coin topped out at around $20k USD and has yet to see such heights since.

Despite the coin’s prolonged bull run of 2018 & 2019, and the devastating market shake out of March this year, bitcoin has since seemed to stabilize, and may be headed toward another bullish year, thanks to DeFi. 

DeFi is merely the banking system to cryptocurrency’s monetary one. Just as bitcoin acts as a decentralized store of value, similar to fiat; DeFi acts as a decentralized financial instrument similar to banks and other centralized financial institutions. What sets both cryptocurrency and DeFi apart from their traditional cousins is in fact the aspect of decentralization. Neither crypto nor DeFi have any centralized authority, instead networks are maintained by users and transactions are logged in public ledgers using complicated cryptography. 

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What Role Does DeFi Play in Our Lives? 

DeFi institutions are generally accessed via decentralized applications (DApps). These applications use a series of smart contracts- contracts which are mitigated and verified by algorithms, instead of actual humans, further serving the decentralized infrastructure of networks. These smart contracts serve to automate transactions, making them cheaper, faster, and far more efficient than traditional methods. They also completely obliterate the occurrence of issuance bias and fund manipulation. Increasing sustained accessibility across the board.  

Which could help to quell issues like hyperinflation, or begin to narrow the wealth gap. Leaving investors in sole control of their finances. DeFi accounts stand in stark contrast to traditional financial institutions. Particularly in the way that they are obtained. Starting a bitcoin or altcoin wallet is fairly simple, with few identifying factors that have to be supplied. Unlike opening a bank account, which requires any number of personally identifying and validating documents- like driver’s licenses, criminal history, and even utility bills. Most DeFi accounts often cost little or nothing to open and take virtually no more than 30 minutes. Which is exceptional, considering most bank accounts take weeks to sort out. 

While there remains a very positive outlook on the future of DeFi, there are also some inherent issues that we will need to contend with before it becomes a rock-solid industry. Currently, the hype over the industry is causing a myriad of bubbles and busts. Which can be a very indicting investment opportunity for seasoned portfolio holders. 

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There are also security, sustainability, and scalability issues that also must be addressed as the industry grows. This being said, most DeFi agencies are aware of these limitations and are focusing on them with lightning precision and speed, bringing optimism from proponents of DeFi. Making it an exciting space to watch and to interact with. 

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DeFi’s danger outweighs that of traditional finance, says association of central banks

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The Bank for International Settlements (or BIS) has warned that the crypto industry, as well as the broader non-banking financial sector, threatens financial stability and claims that “systemic regulations” are needed.

“In the crypto ecosystem, risks have arisen mainly from frequent and considerable price drops. It remains to be seen whether such weaknesses are limited to this ecosystem or could spread to the traditional ecosystem,” said the BIS.

“But the potential for spreads should not be underestimated.”

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“As demonstrated by history, anything that grows exponentially is not likely to remain self-sufficient and thus deserves greater attention,” he added.

BIS, DeFi and stablecoins

The BIS has focused much of its alert on the growing Decentralized Finance (or DeFi) sector.

Although the DeFi system “seems to be operating heavily in its own ecosystem”, the BIS has identified a number of issues.

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“In addition to provoking first-rate money laundering issues and investor projection, DeFi demonstrates significant financial vulnerabilities,” the group added.

These vulnerabilities, according to the BIS, “are equal to, but surpassing those of traditional finance”. In turn, BIS targets stablecoins, which “are subject to classic races [bancárias]”.

In another report, published in conjunction with the International Organization of Securities Commissions (or IOSCO), the BIS said that traditional payment rules should apply to stablecoins.

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“This report marks significant progress in understanding the consequences of stablecoin deals for the financial system and providing clear, practical guidance on the standards they need to maintain their integrity,” said Ashley Adler, President of IOSCO at the time.

Bitcoin still raises concerns

DeFi and stablecoins aren’t the only aspects of the crypto industry that concern the BIS.

BIS also targeted bitcoin. In a report published in June, the bank criticized the famous cryptocurrency for its energy consumption and role in money laundering.

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“Bitcoin, in particular, has few redeeming attributes for the public interest while also considering its waste of energy,” he said.

Bitcoin currently consumes approximately 121 terawatt hours of electricity per year, which is more than the amount of energy consumed by most countries in the world.

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What is Decentralized Finance (DeFi)?

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Bitcoin (a payment system where anyone in the world can send money to anyone else) was just the beginning of the crypto revolution. People who develop decentralized applications (or dapps for short) seek to take accessibility one step further.

Decentralized Finance (or DeFi) was pointed out as a possible solution to lower the entry barrier for those who have difficulty gaining access to bank accounts.

More recently, DeFi are being used by cryptocurrency owners for other purposes: to make more money.

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What are DeFi?

As a whole, DeFi applications are financial products that operate on a public blockchain such as Ethereum.

These products are enabled, that is, they do not need third parties. Instead of financial intermediaries such as brokers and banks, everything is automated in the protocol through standalone contracts.

Do you want to take out a loan? You don’t need the bank to lend you the money. You can get a loan directly from your peers.

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Ready to bet on bitcoin futures and other derivatives? Give up finding a bettor. You can let the protocol do it all.

Want to convert one asset to another? Decentralized brokers (or DEXs) can facilitate a transaction without taking a large commission.

Who invented DeFi?

There isn’t a single creator of DeFi, but dapps appeared in Ethereum, invented by Vitalik Buterin. They have since expanded to other networks that use autonomous contracts to automate transactions, including Solana, Binance Smart Chain and Avalanche.

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Andreessen-Horowitz (a16z), the major venture capital firm, has led multi-million investment rounds in both the Compound and MakerDAO, protocols that are the cornerstones of the current DeFi system.

What is so special about DeFi?

DeFi have several fundamental features.

First, they are “open”, meaning you can use the applications when creating a wallet (usually without showing any identifying information such as name and address). This is theoretically (if not technologically) simpler than having a bank account.

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Second, you can move funds almost instantly via a blockchain, so you don’t have to wait for the bank transfer to take place.

Third, the fees (at least for now) are much better than in traditional banks, although transaction costs vary depending on the blockchain network.

Finally, dapps work together as “Legos of money”. This “composability” allows anyone to create, modify, mix and match, link or build on any existing DeFi product without permission.

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Unfortunately, this feature can be one of DeFi’s biggest weaknesses, as if a fundamental element, such as the stablecoin DAI, becomes vulnerable or becomes corrupted, the entire ecosystem built around the DAI can collapse.

What can be done with DeFi?

Borrowing and lending

If you have cryptocurrencies, you can lend them to a protocol, such as Aave and Compound, in exchange for interest and/or rewards. It is also possible to borrow cryptoactives from a protocol, which can be very useful if you want to make a trade.

But be careful! Most DeFi protocols use over-guarantees, where more money is allocated than the amount you want to borrow; if the asset’s value drops too low, the protocol can take its warrant to avoid losses.

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Many DeFi users use loans as a way to earn assets through “yield farming,” in which they lock funds in an asset pool to gain rewards.

Since rates vary depending on protocol and asset, experienced yield farmers move their assets and capitalize at the best rates.

Negotiation

At centralized brokers such as Coinbase and Binance, you are dependent on the broker to take custody of your assets on every trade. Decentralized brokers remove the middleman so that people can trade directly with each other.

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Also, DEXs such as Uniswap and PancakeSwap allow people to list new tokens for trading. Lack of verification increases risk, but it also allows people to “get early” on new assets before they hit the markets.

Derivatives

Sometimes you don’t need to be limited to trading specific currencies or tokens. Derivatives platforms like dYdX and Synthetix allow people to do more than spot trading.

For example, users can engage in leveraged trades, where they bet more than they have or create “synthetic assets” that mimic traditional stocks and commodities.

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How are dapps developed?

Anyone capable of writing standalone contract code is capable of creating dapps. There are several tools to test and/or implement standalone contracts, including Truffe and Ganache (on Ethereum).

After downloading the framework for creating autonomous contracts, you can create a token that allows a protocol to use the blockchain network. On Ethereum, the token default is ERC-20; at Solana, SLP; and in Binance Smart Chain, BEP20.

Having a token allows the protocol to interact directly with the currency of the first-tier blockchain. But projects also promote their tokens to drive decentralization.

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The Compound Loans protocol, for example, uses COMP as its governance token; those who have it make decisions about the protocol’s code and treasury allocations.

How to use DeFi products?

Anyone can use DeFi products by going to a dapp’s website and connecting with a crypto wallet, like MetaMask on Ethereum or Phantom on Solana. Most dapps do not ask users to provide personal information or register.

However, since dapps are built on a blockchain, you must use that blockchain’s currencies to pay for transactions. Ether (ETH) is required to pay transactions on the Ethereum network, just as SOL is required on the Solana blockchain.

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The future of DeFi

As of November 2020, less than $20 billion worth of locked-in value on various DeFi products, primarily on Ethereum. As early as November 2021, that number had risen to nearly $98 billion.

If the trend continues and the DeFi maximalists are right, this is just the beginning of a huge DeFi wave. True advocates argue that the advantages of an open and decentralized financial system are irresistible for not capturing trillions of dollars of value.

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BadgerDAO: Hackers drain $10 million in latest DeFi breach

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  • BadgerDAO suffers $10 million hack
  • Traders were sent illicit permission notifications
  • BADGER loses 15% of its value

The decentralized finance industry of the crypto sector has now become one of the most sought-after industries. This is because it provides users with anonymity, and they can carry out their activities without the prying eyes of financial institutions. Furthermore, traders are open to making huge amounts of profits in the protocols in the sector by staking or farming. However, some illicit actors would rather exploit and steal from people instead of making their profits. In yet another hack case in the DeFi sector, hackers have exploited BadgerDAO, draining $10 million from the decentralized finance protocol.

Traders got illicit permission notifications

BadgerDAO is a protocol in the decentralized finance sector that allows traders access to various lending services and takes collateral in Bitcoin. According to the platform, upon calculating funds missing through the exploits, things are sitting around $10 million. In the reports that made the rounds today, users claimed that the hack was perpetrated through BadgerDAO’s interface and not its smart contracts like most hacks. Users claimed they were sent notifications about allowing new permissions while carrying out activities on the platform. With some users allowing the permissions, the hackers could cart away various amounts of digital assets going to a worth of $10 million.

BadgerDAO’s native token plummets

After the hack, the protocol developers said that users complained that they witnessed the unauthorized drawing of funds from their accounts. However, the protocol has moved into action swiftly, putting everything on the protocol on hold at the moment. The developers have also claimed that engineers are working tirelessly to fix the issue and ascertain the level of damage that the breach may have caused. However, BadgerDAO has refused to comment on the exact amount of missing funds on the platform and the level of damage that needs repair before operations can continue.

Some analysis websites have claimed that the amount exploited from the platform is $100 million. After the hack, the native token of the platform, BADGER, dipped in value, losing about 15% of its value, and is currently trading around $22. Hacks have now become predominant in the DeFi sector as the year draws to a close. Some days ago, MonoX, another DeFi protocol, got hacked with the illicit actors carting away more than $30 million in different digital assets.

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