There is a new wave of financing coming, and it is going to change the way money is handled. Have you ever considered the fact that you do not actually own the money in your bank account? If you have thought about this, then Decentralized Finance is right up your alley.
Decentralized Finance (DeFi) is the most recent evolution in cryptocurrency. Why is this an evolution? It is a system where software is coded to cut out the broker in the middle.
The basis of DeFi is a system where coding is written to interact directly with buyers, sellers, and lenders to allow borrowers to interact peer to peer or directly with a software-based application. This is different from all banking systems where users must interact with a company, which makes it decentralized.
DeFi has been created as an extension of blockchain technology, where DeFi is a decentralized system containing a mix of open-source technologies. These transactions are conducted using smart contracts that allow for automatic agreements and rapid transactions between buyers/sellers or lenders/borrowers.
This is how DeFi is able to remove intermediaries and function as a peer-to-peer transaction.
Think of the Decentralized Finance system as a process like this – when you walk into a coffee shop and pay for a coffee with a Visa card, these payments go through Visa, who acts as the middleman to send the money to the recipient. They control the transaction, and ultimately hold the authority to make the payment happen. With DeFi and cryptocurrency, the holder of the crypto remains the authority of the transaction, which, in turn, allows you to own your money.
Payments are not the only aspect of Decentralized Finance that is intriguing about this evolution in blockchain technology.
Here are some of the more popular ways it is being utilized
1. Lending platforms
These are platforms that allow users to lend out their crypto to users as loans based on the amount they hold within their account. This is an area that functions like a bank, where instead of having to go through a credit check, the user can borrow a certain percentage of their account without withdrawing from their holdings. Example – Users have $100k and are able to borrow up to 50% of their holdings at 3% interest. If the user makes timely payments – the account is completely restored to its full value. If the user is not able to make payments on time, the lender will take control of the amount loaned out of their holdings.
This is a platform where an investor will collect cryptocurrencies/tokens and lend them to borrowers, in turn, paying back interest to the investor. These rates can be fixed or variable, which is based on the crypto asset and the platform. This strategy is based on earning a high yield return on the assets in the account. It is a straight way of earning up to 100%APY on a crypto asset. These types of returns can be returned in the same coin or in a different coin. The returns of the coins can help increase the rate of return as the value of the coin grows over time. This is different from a regular bank account, where money can accrue interest on the money that will only decrease in value over time.
This is an aspect of cryptocurrency where it creates price stability over time, which has been the biggest area of concern – price volatility.
- It redistributes the crypto asset to help reward validators or holders for maintaining the specific coin.
- This limits inflation and creates a deflationary coin that grows in value over time.
- This aspect can be considered as a block reward or as a reflection from trading volume.
An example of this would be a block reward for mining (validator) a certain amount of Bitcoin over time. If a miner completes a certain number of equations over time, then the Bitcoin Blockchain will reward the miner with a block of Bitcoin.
Another example of this is with a deflationary token, where a percentage of the trade is collected and redistributed to the holder. A coin/token collects a small fee and instead of keeping that fee it is redistributed back to each holder as a reward for its investment.
The biggest name in the new wave of Tokenomics is a crypto token called Safemoon. This crypto token is a community-driven project launched in early 2021. Currently there are more than 2.3 million holders according to BSCScan.com and upwards of 1 million more on various exchanges.
Backed by former U.S. Department of Defense employees, Chief Executive Officer, John Karony, and Chief Blockchain Officer, Thomas Smith, the premise of Safemoon is a deflationary token. The holders are rewarded for maintaining tokens in their wallets, and a portion of each trade is sent back to the holder, while another portion is burned from existence.
This action will help create price stability and work against inflation as supply is completely removed from existence with each automatic burn. This also acts as a reward to the wallet and discourages selling.
This is their biggest feature – the reflection.
Reflections or static rewards are based on the size of the wallet and the amount of volume traded.
- Larger the wallet – larger the reward
- Encourages holding for the larger reward and increases price stability over time
Other separating factors are adoption and utility.
Safemoon has just completed sign ups for Beta Testing on their Wallet and has plans on releasing an Exchange later this year.
The wallet will allow for easier purchasing access and will include Apple Pay, which means that many online stores will accept Safemoon as a form of payment. This is important because it immediately adopts Safemoon as a form of payment via Apple Pay.
The exchange will incorporate tokenomics across all coins/tokens on the platform. This can be done by taking some of the trading fee and giving back some of the coins to the user. A trading fee is common across any exchange, but the return of a portion of the coins to the holder is revolutionary to the industry. This is a process known as Cryptonomics.
Safemoon also has their own blockchain, cold wallet, and NFTs planned in the future.
Adoption and utility are the driving forces in every aspect of cryptocurrency, and Safemoon will have achieved a large part of this in the very near future.
** PLEASE NOTE: This article is not financial advice. You must do your own research. These are observations as to what is happening in the cryptocurrency and DeFi world and is an exciting field that is worth exploring and learning more about.