(English) What is DeFi? Potential and risks of decentralized finance

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1. DeFi Finance- What is Decentralized Finance?

Defi is short for Decentralized Finance. DeFi is the latest term based on Blockchain and Cryptocurrency. Therefore, DeFi is different from CeFi.

what is defi

1.1. Features of DeFi

DeFi can be considered as the most practical application of blockchain because it has the advantages of this technology, including:

Eliminate third parties: No need to go through a bank, financial institution, or an intermediary like traditional finance, DeFi completely cuts out 3rd parties so that users can maintain control of their money. Disputes that arise will be resolved in a pre-specified manner.

Smart Contract: A generic method of eliminating third parties relies on undeniable logic code on the blockchain network to trigger its execution instead of human intervention. DeFi often benefits from smart contracts.

Automation: Use Smart Contracts to simplify the process but still ensure speed and accuracy with each contract.

Cost savings: Cutting costs in the role of lawyers, personnel to perform contracts.

Autonomy: Once engaged, stakeholders are not subject to external authority, but only to the terms they have agreed to in the Smart Contract. This feature also prevents them from being manipulated by either party, ensuring the safety and security of contractual agreements.

puzzle piece defi

1.2. Ingredients of DeFi

1.2.1 Yield Farming:

Yield Farming is a concept of generating profit as much as possible from assets they have invested by providing liquidity for DeFi protocols.

Yield Farming is done mainly using ERC-20 tokens on Ethereum, and the rewards are the same. Several protocols are available in the DeFi ecosystem, allowing global participants to lock their crypto and monetize it. Farmers will continuously transfer their funds according to different protocols to get a high-profit level.

1.2.2 Liquidity Mining:

Making money by depositing money into a platform generates a profit, and you will be sharing that profit. This reward is usually a governance token.

1.2.3 Margin Trading:

When making day trades in the traditional stock market, you pay a certain amount to the broker, and you get to invest many times that amount. You will have to pay back the amount you borrowed with a fee. The remaining balance after the successful investment is your profit.

Some DeFi service providers allow participants to make margin trades. Instead of stocks in the crypto world, they use cryptocurrencies.

A core benefit of DeFi is the ease of access to financial services, especially for those who are isolated from the current economic system. Another potential of DeFi is the frameworks and modules on which it is built. In other words, interactive DeFi applications on public blockchains can create entirely new financial markets, products, and services.

2. NFT – Non fungible Token

NFT or Non-Fungible Token (Unique Token) is a unit of data stored on the blockchain representing a unique asset. These can be viewed as fully digital assets or as tokenized versions of real-world assets.

The concept of “NFT” has been around since 2017, and the name CryptoKitties associated with this concept has made waves in the market when it “clogged” the Ethereum network. After more than three years of growth, the NFT ecosystem has gradually improved with many rich and diverse puzzle pieces.

cyptokitties

Source: cryptoviet.com 

An NFT token is not divisible like other token standards. Instead, it is seen as proof of ownership and authenticity in the digital realm.

3. Cross Chain

Cross-chain is a solution to help transfer assets from one chain to another to optimize the ability to combine between chains.

4. Potentials of NFT

the potential of defi

Source: defipulse.com

TVL (Total Value Locked) is the total amount of assets locked in DeFi applications. The larger this number is, the more attractive DeFi is to users.

DeFi’s TVL continues to grow and is currently at $43.5 billion.

5. Risks of NFT

It can be said that the most significant risk problem that the Defi market is facing is Defi hacking. Hackers’ tricks are increasingly sophisticated and complex, leading to the situation that up to 7 projects are hacked within just one month.

Most recently, the DODO project lost $3.8M because of a hacker attack.

Below is a summary of the latest hacked projects within the past month (March 9, 2021).

risk of Defi

Source: Coin98 Analytics

6. DeFi ecosystem

  • Coinbase Ventures – Open Finance: This unit has invested in many projects such as Reverse (RSR), CELO, Compound (COMP), UMA, Graph (GRT), Near Protocol, DPharma.
  • Binance Smart Chain: In addition to its Blockchain, Binance Smart Chain, other projects such as Pancakeswap (CAKE), Alpha, Burgerswap (BURGER), Venus (XVS), Spartan Protocol (SPARTA), Bakery (BAKE).
  • Solana (Build Crypto Apps that Scale)
  • Huobi Finance Chain
  • Besides, on the market today, many other units are trying to create their Defi Ecosystem, such as TomoChain (TOMO), Algorand (ALGO), Zilliqua (ZIL), Ontology (ONT), Fantom (FTM), Akropolis (AKRO), IconX (ICX).

7. Gourmet Galaxy

One of the typical projects of combining Defi and NFT is Gourmet Galaxy which is currently operating on the Ethereum Blockchain. This project is a Yield Farming platform that promises to be further developed to support the Polkadot ecosystem.

Gourmet Galaxy owns five significant products:

  • SUM Swap: Swap token – This product is based on AMM-based swap protocols like SushiSwap và Uniswap.
  • GUM Farm: Yield Farming
  • GALAXY Markets: Participants can trade GUM that users earn from farms in this area. The operating method is as follows: users will utilize FOOD (1 type of NFT token) to swap for another NFT named PLANET according to its formula. In particular, PLANET tokens exist only a certain amount in the NFT Universe, and each PLANET contains a unique worth.
  • NFT Universe: in essence, NFT Universe is a DApp operating on the Ethereum Blockchain and intends to merge into the Polkadot Ecosystem soon whenNFT is officially available on Polkadot. NFT Universe can be considered a “game world” consisting of various Defi applications gamified. Typically, Options or Leverage are games that are similar to trading games. In addition, there will also be other types of games with more straightforward applications, NFT. PLANET is especially the most valuable asset in the ecosystem.
  • GUM Pad: cryptocurrency projects can raise capital through GUM Pad by swap tokens at a fixed rate.

8. References section

Some concepts:

AMM (Automated Market Maker): Unlike traditional exchanges, the bid and ask prices on the exchange are equal without the user’s orders… As soon as the user has a need, the buy or sell order will be matched immediately and the currency value in the transaction is also adjusted by the algorithm.

Uniswap’s formula: x * y = k (x: number of coins/token liquidity pool; y: number of coins/tokens remaining; k: constant) – That means total liquidity pool should always be fixed. When you want to take 100 USDT from the pool, you must also deposit 100 CAKE into the pool, now the ratio is 900 USDT & 1100 CAKE. Similarly, on the next turn, you must deposit 110 CAKES into the pool to receive 90 USDT.

Off-Chain: refers to transactions that take place outside of the Blockchain

On-Chain: transactions that take place and are saved on the Blockchain

What is DAO Maker (DAO)?

DAO Maker is a platform that allows crypto projects to raise funds. Small investors will be advised on low-risk participation strategies by DAO Maker.

Some typical DAO fundraising methods:

  • SHO (Strong Holder Offering): 

Is a method of distributing tokens to small investors based on their contributions to the project.

For those participating in the public sale, it is necessary to join the whitelist by checking the wallets they use the most.

Following registration, each wallet will go through a transaction history check to establish a score based on the following criteria:

Has a history of holding a certain token/coin.

Has LP activity (provide liquidity)

  • DYCO (Dynamic Coin Offering):

Participants (investors) can refund purchased tokens with DYCO.

If the token price declines after DYCO members purchase tokens on the market, DAO Maker will accept a token refund. As a result, when the token value declines rapidly, participants (investors) are not at risk. The recovered DAO tokens will be burnt automatically, reducing the circulating supply to zero.

DYCO was founded to encourage projects to have a serious and responsible attitude for tokens that they have created.

  • Vending Bond (Trái phiếu mạo hiểm)  Is a risky investment product with a risk index of almost 0

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