In our first article, we defined what Cronos Chain is, what its properties are and how does it connect to the Crypto.com ecosystem. In this article, we are going to talk about what can and will be built as the first set of applications by analyzing Ethereum’s killing DeFi applications.
DeFi applications are protocols that are composed of computer code. They are automated and distributed on the blockchain. The code is neutral to every one of the protocol’s pseudonymous participants. The open-source nature of DeFi opens it up to public scrutiny, and rapid innovation takes place because every problem needs to be solved once where developers can innovate on top of each other without permission.
Traditional Finance is struggling against DeFi because its capabilities are severely limited compared to Decentralized Finance. World Bank’s published a report in 2017 states 1.7 billion people are unbanked in the whole world which means they don’t even have a basic savings account. Being part of Decentralized Finance is just one click away for anyone who has an internet connection in the world regardless of their nationality, location, financials, or political background. Traditional Finance is also inefficient compared to DeFi. Examples are: International wires are taking a couple of business days, charging excessive fees and, having total surveillance and control over their clients to mention a few.
Making financial applications accessible to everyone in the entire world, opening a window of opportunity and functionalities in Finance that wasn’t possible with traditional finance, and leveling the field of financial opportunities globally is what the DeFi movement is all about.
So, it is all good when the finance world gets more efficient and fair but what are the exact services DeFi provides for users?
Lending and Borrowing
In DeFi, anyone in the world can lend money to anyone on the blockchain by the means of smart contracts without jeopardizing their capital. Yes, anyone. DeFi applications are allowing collateralized loans for quite some time which means you fund your loan with the cryptocurrency you hold. When you are ready to pay back what you borrowed, you get back the crypto you locked in the smart contract. For example: If you have 10,000 worth of Ethereum and you need 5,000 cash on hand but you believe in that Ethereum will go up in value so you don’t want to sell off, you can lock your 10,000 worth of Ethereum in a DeFi smart contract and take a loan of 5,000. This way your loan would be collateralized by %200. If Ethereum doesn’t lose value by %50 until you pay out borrowed amount plus the given interest, your collateral is safe.
The interesting part of borrowing in DeFi is, you are borrowing from someone you don’t know. From a pseudo-anonymous person who lent their crypto to the smart contract protocol in exchange for interest as you locked your collateral in the same smart contract for the exchange of an ability to borrow against the collateral.
However, most people who would like to take out a loan do not have the collateral in the first place. That’s why traditional banks have a credit score system. Applications are being developed for allowing users for borrowing without collateral. There are working examples of protocols that give uncollateralized loans to institutions but it isn’t quite ready for individuals yet.
A fully decentralized exchange(DEX) offers a new paradigm that erases relatively problematic bottlenecks that centralized exchanges can cause. They offer more privacy, they can be comparatively cheap, less hacking risk involved and users are in full custody of the capital/crypto they own.
An on-chain decentralized exchange protocol utilizes liquidity pools instead of order books. This new technology opens up a couple of new opportunities for both traders and liquidity providers. Providing liquidity is an operation of locking your capital to create a market for traders to participate in. Liquidity providers participate with capital/crypto they own to provide liquidity for decentralized markets, in exchange they earn from the trading fees collected from traders who use the exchange. The opportunity of passive income for anybody who would like to provide liquidity is possible this way via decentralized exchanges.
Benefiting from a DEX is attractive for traders as well, because they can exchange their tokens in privacy(no third party is watching what you do) without going through KYC processes. They can pay fewer fees by choosing a blockchain or a liquidity pool that offers cheap transactions fees. Less hacking risk in DEXes coming from their code is under the public eye because of the open-source culture of cryptocurrency applications so a lot of people can poke holes before the DEX protocol could be dropped to the blockchain. Trading meanwhile owning the full custody of the capital is only possible within a decentralized exchange because users don’t deposit money to the custody of an organization, they directly interact with a liquidity pool and execute trades instantly.
Last but not least, DEX protocols offer 24/7 service with zero amount of human interception. Once the smart contract protocol is dropped on the blockchain, it is open to everyone which allows it to be fully transparent and permissionless unlike centralized exchanges or banks in traditional finance.
Crypto Derivatives – Synthetic Assets
A derivative is a contract whose value is derived from another underlying asset such as stocks, commodities, currencies, indexes, bonds, or interest rates. For example, when you buy gold with your bank account, you are buying a contract that delegates the value of the gold you have purchased. The gold isn’t being physically held for you, the contract that derives the price and value of the gold is what you own.
It turns out that you can do something similar although groundbreaking with cryptocurrencies when it comes to derivatives. These are called synthetic assets. A synthetic asset is simply a tokenized derivative that mimics the value of another asset. Instead of a contract that is being issued for a particular asset, you can issue a cryptocurrency for that. An example would be: creating a token that tracks the value of a stock. Would you like to buy a synthetic asset that tracks the value of a Tesla stock? If so, why would you? There could be a couple of reasons:
- You don’t have access to the opportunity of buying a Tesla stock because you are not in the US and your country or jurisdiction doesn’t have reach to the US stock market. But a synthetic Tesla token can be traded on any crypto exchange in the world, including unstoppable decentralized exchanges.
- Synthetic assets are blockchain assets like ERC-20 tokens; so you can send and receive them between standard cryptocurrency wallets. It is hard and expensive to move your stocks between banks or exchanges in the traditional world compared to frictionless instant transfer of ERC-20 tokens.
- Ability to switch between equities, synthetic silver/gold, and other assets without having to hold the underlying asset. This means you can trade your Tesla token for a token that tracks the price of gold, directly. This isn’t possible in the traditional finance world.
- You have reached worldwide liquidity because you aren’t limited by platform or exchange. Your Tesla corresponding synthetic tokens are tradable anywhere on the internet, unlike traditional stock markets that are limited or under scrutiny for the location of their users.
In summary, the biggest advantage to trading crypto synthetic assets over ordinary equities on exchange apps like Robinhood is simple: synthetics give you unlimited, uncensored, and instant access to any asset imaginable by leveraging the capabilities of blockchain technology.
All of the applications mentioned above along with DeFi ethos are portable and buildable in Cronos Chain because it is EVM compatible. EVM compatibility has been explained in our Cronos Chain Level One article. There are a lot of zero to one applications Ethereum and Cronos Chain alike enable. We will be featuring more functionalities of DeFi in the future. Utilizing these applications requires some fundamental knowledge for users to be more aware of the risks and advantages they would be exposed to. Crypto markets are pure examples of quality information transforming into the capital where we strive towards procuring that quality of information for our readers.
I’ll see you in another educational article. The best strategy in crypto is: first to build conviction by learning, then hodl with a conviction for an extended period.