What is DeFi (Decentralized Finance) : Layer by Layer

Two billion dollars have now been locked in, you remember? Not that long. We were freaking out when one billion was locked in. Right now it is two billion and compound right now is dominating this whole market.Add Speaker00:05:08.180And we have to understand that there are a lot of people making tons and tons of money by farming. You all know that yield farming when you use a protocol just to get the reward in their native token such as comp, balancer, synthetics, ampleforth, ren. They’re all been doing a lot of this yield farming. And why is it so? Well, because these tokens are worth a lot compound token worth a lot, Balancer worth a lot.

Different projects have been distributing 21 million a month in native tokens to incentiveze users to bring capital to their networks. So it’s a big fight for capital. And obviously some people are starting to scream scam.

Like we mentioned, Adam Beck screaming a scam like crazy, like crazy.

in order for us to understand whether it’s all a scam, we need to understand what this really is.

What is Defi ? What is this industry ? You’ll get full understanding of the key protocols, such as compounds such as Aave, such as the balancer such as Kybre, such as uniswap, Curve, such as set and others. Because if you don’t understand that, you are very, very misled. You don’t have any clue about blockchain, to be honest with you, if you don’t know what this is and you think that you are up to date in your knowledge, what blockchain is what crypto is, how it works.

What is the future of crypto? I guess you don’t know anything. The same thing is if I meet a lot of people who think they know what the system is, they still think that Ethereum is just to create a token to do some trading with token and to have some kind of game with ERC 721. They have no clue what these projects are. And then they think they can tell me what is the future of Ethereum and why it will never succeed.

In reality, what we’re seeing right now is the recreation of a new financial industry. We’re increasing the old fashion industry on the block. How is it so? Well, we need to recreate the key features of the old financials of the traditional financial industry. For example, we need to recreate Lenzi and lending needs to be decentralized. It needs to be peer to peer. It needs to be very, very open so anyone can be part of it.

Anyone can borrow money and and be lending out my name without any permission. As long as you have capital, you should be able to do so. And right now we do have a bunch of protocols allowing for that. For example, a busy block by Comp. Coinages Curve and a few others. Now, this is one of the features of the financial system that we have a money market. We have a credit market now. Number two is the fact that we need exchanges right now.

If you want to exchange different assets in a traditional ecosystem, you need to go to an exchange, whether it is Nasdaq, whether it is some commodity exchange, whether it’s some derivatives exchange, you need to go to centralized entities.

Right now, we are recreating all of that on the Blockchain. And whether it is that you want to trade asset whether it is that you want to trade the NFT (Non Fungible Token), for example open sea, whether it is that you want to trade derivatives, for example, DyDx and others, you can do that on the blockchain completely without permission. Everyone can be partners. And you will soon understand how people are making millions by being open minded and learning all of this.

Decentralized exchanges or Dex are huge and they are a key part of this new financial ecosystem.

Decentralized Derivatives

Other than Dex is derivatives. Derivatives are complex financial instruments and people will always want to have derivatives. People will always want to speculate with leverage and options, but options and futures are not only for speculation. You know, the famous story of chicken mc nugget without Ray Dalio and his financial skills, McDonald’s would never be able to launch it because they needed to secure the price of chicken through options.

So in business, options are important and future is extremely important, but also for speculation, for trading, for investing. They’re also very important.

Example of Decentralized derivatives are DyDx and Syntetix. We have a lot of them and different protocols do all all kinds of features for that. You have different wallet because at the end of the day, you want to have a nice, clear interface where you can access all of this infrastructure.

So you have Argent, you have Coinbase wallet. we have a few others. But Argent is the most important from this, at least according to me. You have asset management. So these are protocols that rebalance their portfolios automatically, depending on the market prices. You do have insurance, it’s a lot of different kinds of of products. We are recreating on chain that are replacing the traditional financial ecosystem and it is like we are all on a big secret that most people don’t even understand.

Most bankers have no clue what’s coming for them. Most people in finance have no clue what’s coming for them. And this is while we have this big secret that you can actually add and you have a lot of opportunities, because once the traditional financial system recognizes this, it the opportunities will be gone. Why? Because they will enter and they will be established themselves

But you understand that a lot of smart people will start acting in this industry and you will be now competing with all of them.

So while we are early on, here is where you have a lot of chance for success. Now, before we start, start talking about whether it’s all a big fat scam or not.

Here are the fundamentals.

Compound Finance

Everyone knows that what is compound will compound is a protocol for lending. It is basically crowdfunding. You can think it’s crowdfunding. You can think it’s peer to peer lending. There are many different ways to say it. But all in all, it is that people with money can now earn interest on the blockchain by lending out their money in a decentralized way. And then other people who want to take money, they have they need to pay for something.

They need to get the loan. Instead of going to a bank, they go to the block chain and they get that loan. And because block chain is this decentralized computer you can think of, for example, the theorem dissensions computer being built with block chain infrastructure. At the core, it means that I can lend you money, get interest from you and you pay me money. And we settle all of this transaction on the Blockchain. And so we can you can create credit and then you can settle a credit all on the blockchan without intermediaries.

Maybe the most simple way to describe it is peer to peer lending on steroids. That’s exactly what compound is. Sometimes I feel that when we use complicated terms such as liquidity pools, liquidity providers, people get scared because they don’t understand something. They just point at it and they scream, it’s a scam, bro. It’s a scam. I have no I have no clue what is liquidity provider This must be a scam.

In reality, it’s very simple. It’s peer to peer lending on the block chain. It is right now the biggest protocol in Zevi. It is right now a very important DAP and use case for this technology.

Compound leverages audit the smart contracts responsible for storage, management and facilitation of all pooled capital. So you have people with money, they pool their capital together, interest more contracts than other people. They want to have that money for different reasons, for different applications, for different use cases. So they go into the smaller contract. They take that money. They have a collateral in case they don’t pay back. Their collateral gets taken and then they pay interest.

So all in all, it’s amazing. Compound is one of the biggest innovations we’ve seen. The process for lending assets is pretty straightforward, simply enables supported asset and finance transaction. So you basically use your metal mask. You’re a real private. Do you sign it? It’s very easy. And you can lend out money. You can lend out money easily and earn interest.

Now, is there some kind of risk here? I mean, obviously, if you borrow money with collateral, you could get liquidated. If you take out a loan on account compound, your collateral goes down in value because your collateral is some kind of token and you lose value in that. If if the market goes down, of course you can get liquidated. But is how the system works, you need to learn the risk and to learn the benefits.

Now, if you’re using it, you need to keep in mind that when you’re taking out a loan, you have to use your brain a bit here. If you take out a loan and your collateral goes down in value, it might be this. You get liquidated. Absolutely. Absolutely. So this is how it works, is open forever.

Anyone can use it. It’s amazing. It will replace the banks 100 percent. Now, let’s move on to the next one.

Another important protocol is Aave is also a lending protocol. it’s very similar to compound. So it’s also people with money. They come in, they lock in money. People that want to have money, well, they want to borrow money. They give a collateral. They borrow that. They pay back interest if they want to get back their collateral. So it is almost like companies very, very like compound. But they do have some more features, innovative features, for example. They were the first to enable flash loans.

And this is that you have a pool of money. So people with money, they come in, they they lock in their money. Basically, you can, with a simple line of code, take out millions, millions of dollars from that liquidity pool without collateral. You just take it. You get it. But you need to repay it in the same transaction. But in the same transaction, you can also funnel it through different Dex’s you can funnel it through different markets.

You can earn arbitrage, you can keep the profit. You can get to get back the loan. So this is something with issues step by step in our defeat to a one course, how to take out a flash loan and how to use default arbitrage.

For the record, Aave was called F Lend in the past and then they rebranded and to be honest with you, you see that they did have an ICO in 2017. So it just shows you that Some ICO are amazingly successful and this crowd funding model has also showed its benefits. Obviously, we saw many scams. But when you look at aave, you look at other DeFi protocols that are huge. Today, for example, Kyber is another one, which I will tell you about.

It is amazing what we have created. It’s absolutely amazing. So also, you do have some variation in how rates work. So on other you can say, hey, I want a stable rate or a variable rate, just like when you take out your mortgage, you decide do you want to have variable rate or stable rate so you can do it with others as well. So you see all of these different protocols. They do similar things, but they have some distinction.

They have some distinction. And another distinction that has compared to compound is that you have different types of collateral so you can use many different assets as collateral. So, for example, you could use unit swap LP tokens and tokens us as collateral and you will soon understand what that is. But it’s basically this tokens that gives you passive income on units or because it’s basically credit is basically a debt. You’re buying a piece of debt and you get passive income because people are being bad debt with interest.

So is basically when banks buy mortgages from each other. So when you’re saying that there is unit swap LP tokens and talking sets, it is basically like in the traditional financial system you can buy debt, which means that now you have the right to collect the payments on that debt plus interest. So it’s actually an asset for you. You’re earning money on that. The same is true for Defi when you have different lending protocols and you have somebody lending out money.

You get this, for example, you use up your guest units of LP Token and you get passive income on that because people are paying back their debt with interest. But we’ll get in June, so very, very soon. Now, let’s continue. Let’s continue before we make the conclusion whether it’s a big, fat, juicy Bitcoin scam, or whether this is a legit industry.

Kyber Network – Onchain Liquidity Protocol / Decentralized Liquidity

Now, kyber network is another big protocol you should know about.

And I know people ask me a lot about this. And yesterday even I got got the clear question from the chat. Hey, I explain me. Islamic Cyber Network. Well, guess what? Cable network is very, very like compound as well. I mean, the features are quite similar because it’s also on channel liquidity protocol. So people with money, they put in their funds into a cable network. They earn interest. From who? From other people who use it.

In this case, in this case, Kyber is more for applications. So, for example, you could build a decentralized exchange on top of cable network and use cable, network, liquid, whatever you need, whatever application you have in mind. Think about any financial application, whether it is about Lending, credit trading, Decentralized exchange whatever you have in mind, you will need liquidity. You will need liquidity when you build the decks and people start trading.

Obviously, there needs to be liquidity on both sides of the different assets so you can build it on top of Kyber. So old deep applications need access to a reliable source of liquidity to successfully provide digital financial services to its users. And there are people who are willing to provide that liquidity because they have a bunch of money. They don’t know what to do with it, so they put it in Kyber. So different applications that are building different financial solutions in need of liquidity and all financial applications need liquidity.

They can use that capital, but also they pay a small fee to the people who provided that capital. While Central Exchange is currently promised, the majority of crypto assets liquidity provide the majority of crypto as liquidity, deep applications struggles to leverage that liquidity given the nature of central exchanges. So, for example, here’s here’s a great example.

Let’s say you want to build a financial app, you could build it on top of Binance. You basically integrate with Binance API. And then you can have different people log in to your app with their Binance account, and then they can do a bunch of things with each other. I mean, think about different use cases. There are a lot there are a lot of use cases you can build if you build on top of the banking infrastructure. But you can’t because you don’t have the connections.

Nobody will allow you to integrate with Banks API. It will never happen. You cannot connect to their database right now in the EU, though. There is regulation that will force them. But traditionally, it’s impossible for you to build anything and get the liquidity network effect from the traditional financial ecosystem. You will not be allowed to. Why? Sorry to say, but both you and I were plebs in that industry. We’re not part of the elites of the close circle to get access to those features.

If you want to build the next PayPal, good luck. You don’t have the connections. You will not. Nobody will allow you. You want to build the next tribe. Good luck. Nobody will love you even though you have the correct technical expertise. You are the correct person from an entrepreneurial perspective. It’s a cartel. It’s a very, very small club of people that are able to work in that industry. And guess what, you and I are not part of that.

So this is the issue with this is the issue with traditional financial ecosystem and the liquidity there. There is a lot of liquidity there. You could build amazing stuff on top of it. Nobody will allow you. And therefore, decentralized liquidity protocol such as Kyber They solve a huge, major issue in finance and they give us open access to everything when it comes to liquidity. And they are going to eat the banks. I mean, this protocol’s right here.

They are going to eat the banks completely. That is why the bankers, they still don’t know what’s coming for them. Why is it so you understand that when you have an open liquidity protocol is just destined by definition to outcompete other centralized, closed liquidity solutions, such a centralized bankers? And what they’re having their way because this will just get bigger, bigger, bigger and bigger. Everyone can participate in this. This means that you’re incentivized as the liquidity provider.

If you are a guy or a girl with a lot of money and you have to choose. OK. Should I put my money here and get interest in decentralized world? Or should I put my money here and get interest on my money in the decentralized world? It makes total sense to put it in the decentralized world because it’s open. So many people can come in and demand your money. There’s more demand for your cash in a decentralized world than in the central as well, because here it’s all open, which means that everyone goes to the decentralized role.

The network effect gets bigger. And now it’s more and more and more lucrative to be acting in the decentralized world, both as liquidity provider, but also when you borrow because you want to borrow to the best rates. So obviously want to go where the market is most efficient and that will be such as markets. Look, this is where all of the capital will be in the central liquidity market. Nobody will care about centralized markets.

Decentralized trustless liquidity sources are vital to the long term success of DeFi. as such Kyber designed a fully on chain liquidity protocol.

Kyber also did a nice ICO, just for the record, to clean to clean the name of the ICO, although it is completely unclean. There is no way to repair the reputations of this ICO. But still, we can mention a few great successes. But Kyber, for example, is one of them.

Uniswap

Another big, fat, juicy project. These guys don’t have a token yet. And when they will get the token, that will skyrocket, it will skyrocket completely. It is A DEX (Decentralized Exchange But the underlying mechanics are very similar because in uni swap, you also have a money market that that funnels, that fuels, that fuels that Dex.

You have people with money who want to earn interest on their money. They give their money to uniswap. And then uniswap uses that money to trade instantly. So when you set an order, you submit an order to uniswap. Your trade is always executed instantly. Why is it so? Because there is no order book.

When it comes to decentralized exchanges, the first things we think about are poor UXs and thin order books.

So, the old way of creating decentralized exchange is s that you do have an en chain order book where you match orders.

It never works. Instead, right now, we do have this automated market makers. Then you swap is one of them. So what does it mean? While the word might be complicated is very simple. I mean, basically, you do have different pools of assets and you can provide your own money to a pool. So a pool, for example, can be Ethereum and USDT. So you have a pool of two assets.

So when somebody sells a lot ot Ethereum. The price of Ethereum in that pool will go down because now the supply of Ethereum increasing in relationship to its USDT holdings. So this is how the liquidity pools decide the value of the two tokens. It’s a formula basically that sets the price instantly. And the price is based on the supply of one asset in correlation to its trading power. In that liquidity pool and in small contract.

So when there is a lot of some kind of asset in the liquidity pool, it means that the price of it will be lower because there is a lot of demand. Now, if people are buying some kind of asset like crazy from uni swap, then the price with a formula set by smart contract will increase a lot because now is fewer and fewer and fewer of the stockings in that liquidity pool.

when liquidity supplied, Uniswap grants (gives) users liquidity tokens. So here is where you supply your money to uniswap. If you’re a liquidity provider, you want to make uniswap smoother. So you provide money to it so that it can use your money to execute trades fast. You get liquidity tokens because then you will be rewarded with a fee. Now, the you can think is that Uniswap liquidity token you can say is basically debt, it represents the debt that Uniswap swap has to you.

And that liquidity token can then in turn be used. You remember, for example, in Aave to get a loan because obviously it’s an asset. You can get the loan using that asset. So here is where it will go full circle.

for example, as in Aave, you can have unique collateral such as Uni Swap LP and UniSwap LP stands for Liquidity Provider.

So you understand that you’re basically liquidity provider and you get liquidity Token.

This is very key to understand because here is where we’ve opened up so many more opportunities. And this is the same kind of mechanics you do have in traditional world where different companies, institutions that buy each other. Is that because if you have some kind of business and you lend out money and you get interest for that money, I may be interested in that debt, but you may be going out of business. So why don’t I buy your debt?

Probably you’ll ask, what happens to your mortgage when your bank collapses?

What when your bank goes bankrupt? Do you still have to pay mortgage? Well, unfortunately, yes, because someone else will buy that debt from the bank, because obviously it’s that you can you can get money on that. You pay interest on that. So, of course, you will still still have to pay your mortgage, but to another entity. So this is uniswap.

Curve Protocol

Now, let’s go to curve. Curve is another big, fat, juicy protocol. You need to know about now. It is also, once again, very like the others. You only need to understand one thing that it is liquidity providers and liquidity pools. And that’s it. I mean, as as long as you get that simple thing, you see that many of these projects, they do very similar things. And that is that you have people with money providing capital and then people who want to get that capital, they pay interest and they take that capital look in in the Curve.

You have a very, very interesting innovation with their formula. Basically, it’s all about the pricing formula. You remember that in Uniswap. I told you about that. You have asset A, an asset B in the liquidity pool. And when traders buy a lot of asset A. they will push up the price of assets A because the supply of asset, they will go down. So the supply is down, but the price goes up. So basically the protocol just compressed.

Okay. How much of asset A I have in comparison to asset B?

So let’s say that this is basically ETH to USDT.. So obviously when the supply of ETH goes down, then the price of ETH will go up in compared to USDT and vice versa.

Now the other thing that curve does is that they do have an interesting formula how that price develops. I mean, here here are the different assets. So here is, as you can see, price of asset Y and price of asset X. Obviously, when price of asset X is very low, it’s here. It means that the price of asset Y is high. So basically when you have two assets and one asset is being sold a lot. The price of that asset measured in the second asset will go up.

And as you can see, curve, they do just a different a different chart, a different graph, how this relationship looks like. And you can also see us as well. They just do it differently. It’s all about the innovation in terms of small tweaking here.

And also, they have this interesting and windows like bootloader UI.

But anyway, curved very like very like units swap, basically deciding how the price of the two assets develop. When an asset goes down in terms of its availability.

Balancer

Now let’s go to balancer. Now, once again, what what does balance? You always know that it is a liquidity. It’s a liquidity market. You have people with money giving, giving money to balancer and people who want to get money.

So what is difference? Because as you can see, there are many similar things between this projects.

Now, the difference with balancer is that you can have a bunch of other assets in your liquidity pool.

So normally with uniswap, you have two assets in each liquid discipline because while liquidity pool is basically a trading pair.

So when you’re supplying money to unit swap, you need to provide, for example, if you’re ether and USDT, you will basically be providing capital to ETH and USDT pair or you provide asset A and asset B, so you provide liquidity to A B, trading pair. All right. So you have to assess always in uni swap and in curve. But in balancer, you can deposit any amount of supported asset. So basically you can have this this liquidity pools with three assets or more and they all rebalance in relationship to each other. So that’s important. So that’s why it’s also called a asset management platform, because you can basically create a pool and you say, OK, I want 20 percent Ethereum, I want 40 percent of this asset A and 40 percent of assets B and then it will rebalance itself in real time. So when the price goes up of one asset, this will sell it off or vice versa.

So that that’s amazing. Up to eight assets, according to Jarra. So this is balancer. Basically, they add more innovation. As you can see, they tweak this a bit. But the general idea is so simple is basically liquidity markets. We have money. You want to get the interest. Other people want to get money. They give you interest, but different projects. They tweak it a bit differently. And as you can see, because we have a lot of projects doing basically the same thing, but they innovate and they add more twists to it.

It means that there is sometimes and arbitrage opportunities. So you can have a few different liquidity pools having the same kind of trading pair. For example, Ethereum – USDT and you understand that this liquidity pools, they priced their assets based on the formula. And that formula takes into account the availability of the different assets in the liquidity pool. Well, if you have, for example, balancee or uniswap, curve, Kyber, they all have a Ethereum – USDT or some other or some other trading pair.

But on one of the protocols, the balance is off, like there is just a lack of off one of the assets. It means that the price will be off as well. So there is an arbitrage opportunity. So that is where you will have people taking out the flash loan on Aave and funnelling that capital into that arbitrage opportunity and making a quick profit and then removing that arbitrage opportunity. So what does that mean? It means that very soon there will be no arbitrage opportunities because there will be users that use flash loan as soon as there is small discrepancy in the prices of any asset on any liquidity protocol, instantly remove the arbitrage, because, you know, when you use an arbitrary opportunity, you inherently remove that arbitrage opportunity.

And this will mean that defy markets will be the most efficient, the most amazing markets in the world, because all arbitrage, all inefficiencies are removed immediately by anyone in the world. Does the mind blowing thing because anyone can take out a flash loan in the traditional financial space. You know that even if you see an arbitrage opportunity, even if you’re smart enough to figure out an arbitrage opportunity, you will not be able to act on it because you don’t have the capital to go and put there and gain that advantage and remove that that arbitrage opportunity.

Set is also the fact that you you can say that you want the portfolio basically and you want the portfolio to follow. Now, different indicators, technical things, like strength index, moving average. So they add even more twists, but you get the general idea. Now, the thing that many people are worried about is this. The fact that all of these different protocols now start to launch their own coins. And what they do is that when you take out a loan on, for example, compound, you get rewarded in their tokens.

And obviously, this means that people start to take out crazy loans because people are greedy, they take huge leverage. And as you understand, when you take out a loan, you’re putting the collateral and you take out the loan and you pay back the loan with interest. So people are doing that like crazy. Why? Because they get rewarded in comp tokens for using the protocol. And this where things have really, really gotten a bit crazy.

Now, this is obviously not sustainable. This kind of thing. But it is just a temporary hype we’re seeing with yield farming yield. Farming is not here forever in this extent.

No, no, no, no, no. But of course, this industry. This projects, they’re not going anywhere. Guys, this is the most important innovation maybe of the whole human species today, because we’re replacing finance. We’re completely replacing finance. We’re opening up. We’re making it available to everyone. You can do everything you can imagine in the future. Your mortgage will being defied because your house will be used as collateral and it will be tokenized.

All loans you do will be in Defi because it’s more efficient. You’ll get better interest rates when you want to lend out capital. You get a lot of other people who want to take your capital. Look is just the efficient market. That is amazing. And everyone’s incentives are aligned. Everyone will be using that instead of going to a bank or going to a bank or begging them to do something. And it’s not how it should be made. Many countries don’t even have banking services.

Many countries cannot even get credit. You cannot get the credit in many countries because you don’t have papers. For example, you don’t have a permanent address. So, look, this is obviously not going anywhere. This will eat the world. Will it create the bubble? I think so, yes. I think this will create a huge bubble. A magnificent, huge bubble. Why? You see how amazing it is

Everyone who truly puts a few. Minutes into this. For example, if you watch the stream, you probably understand that this is inevitable. You probably understand that banks have no chance against this. There is just no chance. It essentially is open for everyone. You can not be a rent seeker collecting fees in between without providing any value. You can’t. You can’t. Those days are gone. Those days are over. You cannot be an unproductive burden on society, basically taking a few percent, just that you have this cartel run.

Look, it will not be like that. It will absolutely not be there. So this means that more and more people are understanding this and realizing this. They will, of course, overhype it. As always, people will overestimate how far will come in the short term. And people will create the bubble, a financial bubble. It will be an extremely an extremely, extremely huge bubble. Way bigger than the ICO bubble. It will also be sustained for longer, I think, because this is amazing technology and everyone understands it.

Yet I think, as with all amazing technology, it will take a bit longer than people expect to truly go mainstream, to truly go viral, to truly make this part of your everyday life, which will make people disappointed because they think it is going to happen next month. The bubble will collapse. So this is normal. The largest, the dot com bubble ever. Every great tech know, every great technology has a bubble. Every amazing, great technology will have a bubble and it will disappoint people in the short term.\

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