What is DEFI?
Well It's stand for decentralized finance. In the past we have always use centralized finance which where there's a central authority that can control the flow of money. The Government and the Banks can control it. They don't really say they do but they do. They can print more of it if they want to, and can stop you from borrowing it. They can even stop you from having a bank account if they want it too. They can have your money. As they have your money so they can change and you really couldn't argue against it. I mean you could but how would you prove that you gave your money to them. As it based on trust. One more thing traditional finance are preety expensive. Penny loans are upto 500%, credit card can average 25%, and even a personal loan can cost you 18% of your value. These are really high rates because that's what you got.
The alternative is decentralized finance. Where there are no banks, Instead there are piece of code that run and act as a bank. They are open to anyone. They don't require you to trust them because they are literally piece of code running a program. Also they are sensorship resistance and lastly they are much more cheaper than traditional centralised finance.
DeFi on Near Ecosystem is built on three main things
a) Cryptography
b) Near Blockchain Technology
c) Aurora an EVM implemented as smart contracts
Five Pillars Of DeFi On Near Protocol
1) Stablecoins :- So first of all we need to understand the bridge of decentralized finance to the centralised finance and that is cryptocurrency, that is match to a real world assets. For example, Tether and USD or what we called stablecoins. This is because their price is tied to the United States Dollars. Think about it like this. When you buy one for one dollar, a new USD coin is minted. When you withdraw one, a USD coin is burned. So the coin always worth One United States Dollars. Now the purpose of this is to have a reliable way to buy and sell certain coin without having to buy and sell them instead we can trade them.
Here's an example why it might be beneficial. Let's say you bought one $NEAR at $20 and now its $40 and you wanna sell because you think it's high, so you wanna take your profit without stablecoin. So you have to sell your $NEAR at a centralized exchange like Coinbase or Binance and in return they will give you some United States Dollars for it. Now ofcourse they are gonna take cut on that transaction because they wanna fee and they are gonna take it. The next step would to way Coinbase or Binance to give them to your bank, and then bank withdraw from your bank because you don't really want the bank controlling your money. The month later $NEAR drop to $25 and you wanna buy more, so you deposit your $40 back into Coinbase and then buy 1.6$NEAR and hold them. In this example there are lot of fees, taxes and waiting.
Let's say you utilise the stablecoin like USDC. You bought one $NEAR at $20 and raise to $40. Instead going through all those headache, you can trade your one $NEAR for $40 USDC and you just hold it. A month later similar to the previous example it drops to $25 and you trade your $40 USDC for 1.6 $NEAR and then raise to $50, and here's the beneficial part within 2 mins you can sell your 1.6 $NEAR for $50. The fees were less than 1% because you use what we called Decentralised Exchange which is something I explain later. But because of it you were able to trade almost instantly plus USDC was secured and you trusted it because it just a code that doesn't change unlike the Coinbase Or Binance which is controlled by the government and more importantly people.
So that's the purpose of stablecoins. You can be in cryptosphere without actually using your government own bank. Now in lot of places we take banks for granted like in the US but some other countries are really limiting and how much money you can move around or what currency you can buy them from. In fact in the United States every transaction over $10,000 has to be vetted and approved by a bank. Meanwhile using a stablecoin like USDC you can move 10Million dollars from one address to another without anyone blinking an eye. For like a five dollars fee you could never do that with United States Dollars.
And here's the good news Near Protocol soon is coming up with it's own stablecoin called USN
2) Lending And Borrowing On Near
So another important pillar of DeFi on Near. In fact huge part of our current financial situation in the world is based on lending and borrowing money. So it would make sense that a Near Blockchain can do it better. One of the reason we can reliably lend and borrow with banks is because we usually put something down like 20% collateral so that if we never pay back the full loan our government come after us and throw us in jail or make us pay that money. In short there are legal consequences for not paying a loan back.
Well with crypto this is a problem because one of the Pros of crypto is anonymity. You could put 20% down and away with the rest of the loan and never be seen again. So we have to find a way to solve this. In fact with the help of smart contracts we can actually allow others to use our funds while still keeping custody of them. So let me go through the little example. Person A wants to earn interest on his coins while Person B wants to borrow some coins. So a Person A go to compund on Aurigami which is the lending and borrowing platform on Aurora that allows person A to deposit his coins into a smart contracts, in turns what he gets are called C tokens that are representation of his original coins plus interest whatever he wants to. He can just turn his A token or C token into that smart contracts that was created by compounder Aurigami and they split out his original deposit plus interest.
Now the smart contract is created this way so that there's no human being that has to do a calculation or have to do the transaction. It's all automated by code. So that's solve person A wanting to earn interest by lending in a traditional way. In the borrowing Person B must do something called over collateralised his loan. This means if he wants to borrow $100 he must put $120 so that if he run away and never pay back his loan, the smart contract is written in a way that it can pay back to person A coins plus interest.
Now at this point you might be thinking what's the points of taking a loan if you already have the money. Well you probably thinking in United States Dollars. Say you have 50 $NEAR worth $1000 but you don't wanna sell them, because you greatly believe in the near project.
So you put them in a Aurigami as a collateral and borrow $800 worth of Tether which is a stablecoin pegged to the United States Dollars. So you traded that $800 around, and you make some money, you lost some money and you make some more money, and now it's time to pay back your loan. So you have $850 in Tether and you pay back the original $800 loan to get back your 50 $NEAR. Well in this little example you made $50 from the little trade that you did and you just got lucky but it has also been a few months and $NEAR has done great in the past few months exploded. Now they are worth $25 each. So now you have 50 $NEAR at $25 each so now you control $1250 plus $50 you made in the trading. Basically you believe in $NEAR and you have it and you don't wanna sell it, and you don't wanna use the value of it. You can take a loan on it on Aurigami hoping that it will be worth more whenever you cash it out.
Check out the lending and borrowing platform in Near ecosystem :-
3) Decentralized Exchanges on Near
Decentralized Exchange where we can trade coins and tokens for other coins and tokens. Now the fees are usually very small like less than half a percent which is a great benefit for anyone who regularly wants to trade their crypto assets.
The popular decentralised exchanges work in a manner where investor pool their money together and then traders can trade that money. The fee of every trade that I mentioned earlier goes back to those investors and it's all written in codes so it doesn't change. A government can't step in and say you can't buy $NEAR anymore, the fees and the percentage that you charge are locked too. They are written in code so they can't change and can't raise to crazy prices like 15% in traditional finance.
Decentralized exchanges open the world up to a whole new varity of tokens and coins. For example Coinbase the first centralised exchange exchange to go public, and only allow you to buy and sell 32 cryptocurrencies at the moment. Since they are regulated by the government and have to abide by certain regulations, they very closely analyse each coins before adding to it.
The most popular decentralised exchange in Near ecosystem which is called Ref Finance literally with hundred of tokens you can trade and they aren't regulated by anyone. That's the decentralised part. There are billions of dollars locked up in the liquidity pool so trader can trade but nobody can control those billions of dollars.
They are just following a program some wrote, in fact only investors can be the only to pull out their money out of the pool. So like I said code can't be changed. It what we called immutable. So in crypto space we like to say that the code is the law. The government doesn't control, code does. And everyone has access to the code and it doesn't change.
Ref Finance is one of the major leading decentralised exchange in Near ecosystem.
To explore more about it click here,
4) Insurance
Insurance is really easy to explain. For example with a car insurance you pay $100 amount to protect your new Tesla. However one day while using the autopilot feature another car causes the autopilot glitch and you drive into a ditch, unharmed though but you totally wretched the car. Well since you paid the insurance. The insurance company pays you what the Tesla was worth so that you can go buy a new one.
So well, in decentralized finance the insurance company can be the code. Let's say a farmer want's to buy a crop insurance so if his crop dies, he still has the income for planting them and taking that risk. We could write a piece of code on the near network that says if any days this summer that are 90⁰ Fahrenheit or hotter four days in a row pay out a farmer joe a one hundred thousand dollars ($100K). However to start this contract he has to pay two thousand dollars. So farmer joe can buy his crop insurance through what is called smart contracts. Aurora which is just the code that sees if the conditions are met to pay him. So at this point you might have two questions. How does the code know if it's 95⁰ Fahrenheit and where does $100k comes from?
Well to connect the real world to the Near Blockchain we have to use something called Oracles. Which are trusted source become a bridge between the real world and crypto world. We can create an oracle in our city that reads the temperature and is verified by a few people to make sure that it can't be fradued, and then the smart contract Aurara can reliably use it as a data source to decide if insurance requirement are meet or not. Secondly the $100K comes from other people buying insurance that bought the premium but may be they didn't get paid out because the requirements were not met just like an insurance company makes profit people who provide liquidity to any decentralized finance platform may be incentivised with an interest rate to earn on their deposits. In other words some of the $100k may come from investors who earn money by lending their money.
Aurora is an Ethereum Virtual Machine (EVM) implemented as a smart contract on NEAR Protocol.
Read and explore more about Aurora here..
And lastly we have,
5) Margin Trading
In centralised finance to trade on margin you usually need to be able to prove who you are. Along with have a minimum of a few thousand dollars to even have access to the margin trading. The fees are also much higher than five percent and decentralized margin trading can be a lot quicker open to anyone in the world with money and lot safer.
Here's the quick review on all DeFi projects in Near Ecosystem
Final Thought
Hopefully now you can see the value of decentralized finance on Near and why so many people and investors are piling billions of dollars into it.