The Banking Executive Magazine - May 2022 Issue

Will DEFI Take Over Banks? them as collateral for loans. $COMP is the token for Compound protocol. It is a token used by its holders to suggest and implement development changes to Compound protocol. Changes include: selecting which digital assets to support; adding mod- ifications to how $COMP tokens are distributed; and adjusting collateral- ization factors to the platform. Decentralized exchanges: Decentral- ized Exchanges (DEX) are one of the essential functions of DEFI, with the maximum amount of capital locked compared to other DEFI protocols. DEXs allow users to exchange or swap tokens with other assets, with- out a centralized intermediary or custodian. Traditional exchanges (centralized exchanges CEX) offer similar options, but the investments offered are subject to that exchange's will and costs. The extra cost on each transaction is another negative as- pect of CEXs, which DEXs address. The top decentralized exchange is Uniswap. Founded in 2018, UniSwap is the largest automated token exchange by trading volume deployed on the Ethereum blockchain. The project was launched after receiving grants from multiple capital ventures, including the Ethereum Foundation. UniSwap automated transactions between cryptocurrencies through smart con- tracts. UniSwap today offers three functionalities: swapping tokens, adding liquidity, and removing liq- uidity. For swapping tokens users are required to create an account on Metamask to utilize this service. Once a Metamask account is cre- ated, users can select tokens they own to swap for another type of cryptocurrency. To provide liquidity, users deposit an equivalent value of tokens into the token's associated ex- change contract. Once users have to- kens for liquidity, they can add them to a “pool" on the UniSwap interface. Users who provide liquidity on UniSwap earn exchange fees, calcu- lated per the value of tokens offered for liquidity. $UNI is the governance token of UniSwap. The token was launched in September 2020 and was awarded to anyone who has used Uniswap. Stablecoins: Stablecoins are a viable solution to volatility issues surround- ing cryptocurrencies and are helping DEFI gain prominence. Stablecoins' value is tied to a relatively stable asset, like gold or the United States dollar, in order to keep its price con- sistent. Stablecoins became useful during risk-off moments in the crypto space, providing a safe venue to in- vestors and traders. Stability makes them a reliable collateral asset. Sta- blecoins also play an important role in liquidity pools which is an integral part of the DEFI ecosystem and DEXs. MakerDAO: Founded in 2015, Mak- erDao is an organization building technology for savings, borrowing, lending, and a stable cryptocurrency on the Ethereum blockchain. The project was one of the earliest DEFI protocols. Maker protocol tokens are $DAI and $MKR. $DAI is created by locking a cryptocurrency in the Maker protocol. $DAI is used like any stablecoin. It can be traded against other digital assets or used to make purchases. Prediction markets: Predictions mar- kets are platforms where individuals can make predictions on the realiza- tion of future events, ranging from sports or politics to predictions on stock prices and more. DEFI opens these markets for participation. The concept of decentralized prediction markets has long been made through smart contracts. The top prediction market is Augur. Augur is a decen- tralized prediction market platform. The DEFI platform Augur uses Ethereum to harness the "Wisdom of the Crowd" to create real-time pre- dictive data. The first version of Augur was released in 2015. Augur offers two primary actions: • Market creation: Users can create an Augur market by spending some amount of Ethereum. When creating a market, users need to set the taker fees and maker fees, which should be low enough to in- centivize people to bid and high enough to cover the Ethereum cost. • Trading Events Shares: Users can buy or trade shares. Traders can make money by buying positions at a low cost and selling them when the price goes up. People who predict an event correctly will also receive rewards when the market closes. Augur token is $REP (reputation token). $REP is an ERC-20 token used on the Augur platform to create a prediction market, purchase partic- ipation tokens, or dispute an out- come. As the name suggests, $REP represents token holders' reputation in the market. For any action that re- quires tokens, users stake their repu- tation. Asset management: Another class of service offered by DEFI is asset man- agement. It intends to make investing faster, less expensive, and more de- mocratized. Ampleforth is an asset- management protocol of DEFI designed to be synthetic and smart commodity-money. DEFI ECOSYSTEM The launch of Ethereum paved the way for maximizing the potential of DEFI within the financial industry thereby encouraging the businesses and enterprises to build and deploy projects that formed the ecosystem of DEFI. With DEFI, a plethora of op- portunities bring to reality a transpar- ent and robust financial system. Overall, DEFI offers services, includ- ing borrowing, yield farming, crypto lending, asset storage and a lot more. No intermediary is involved in the decentralized exchange. The com- plete process operates via automated applications that are developed on top of blockchain platforms. Also, decentralized finance creates a fair and transparent financial system where anyone can participate. It al- lows unbanked people to access fi- the BANKING EXECUTIVE 10 ISSUE 161 MAY 2022