Decentralized Finance

NFT

Crypto Non-fungible token (NFT) refers to cryptocurrency token that is unique, indivisible and noninterchangeable. NFTs come with myriad options for creating and trading digital assets — such as original artwork and blockchain-integrated collectible games e.g., CryptoKitties. NFTs provide scarcity and provenance of rare assets, both digital and real-world. Non-fungible tokens are primarily built on Ethereum using the ERC-721 token standard. The non-fungible token contains code that indicates it is the only asset with its specific digital identity. This is useful in creating unique digital goods and can even be used to represent rare physical assets such that historical record of ownership can be tracked. The possibilities for exclusive and rare items that can be traded — such as digital art, collectibles, or game pieces — are endless. Platforms like Open Sea, Super Rare, and Nifty Gateway bring NFTs to an evergrowing consumer base. Ethereum is the most popular blockchain for NFTs today, as NFTs are typically built using the ERC-721 token standard. This standard outlines a set of features that each non-fungible token should include, but it does not limit the attributes that can be built on top. The most popular application for NFTs to date is CryptoKitties, an Ethereum-based game that allows for the buying, selling, and breeding of digital cats. A single CryptoKitty was sold for $170,000, which made the platform a viral sensation, attracting a new audience of gamers to Ethereum along with global mainstream attention.

Decentralized Finance

DeFi or “Decentralized Finance” gains inspiration from blockchain, the technology behind the digital currency bitcoin, which allows several entities to hold a copy of a history of transactions, meaning it isn’t controlled by a single, central source. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases. Bitcoin and many other digital-native assets stand out from legacy digital payment methods, such as those run by Visa and PayPal, in that they remove all middlemen from transactions.

Some popular applications are

  • Decentralized exchanges (DEXs): Online exchanges help users exchange currencies for other currencies, whether U.S. dollars for bitcoin or ether for DAI,
  • Stablecoins: A cryptocurrency that is tied to an asset outside of cryptocurrency (the dollar or euro, for example) to stabilize the price, lending platforms: These platforms use smart contracts to replace intermediaries such as banks that manage lending in the middle,
  • “Wrapped” bitcoins (WBTC): A way of sending bitcoin to the Ethereum network so the bitcoin can be used directly in Ethereum’s DeFi system. WBTCs allow users to earn interest on the bitcoin they lend out via the decentralized lending platforms described above.
  • Prediction markets: Markets for betting on the outcome of future events, such as elections. The goal of DeFi versions of prediction markets is to offer the same functionality but without intermediaries.

Decentralized Finance

Lending

Lending markets connect borrowers to lenders of cryptocurrencies. One popular platform, Compound, allows users to borrow cryptocurrencies or offer their own loans. Users can make money off of interest for lending out their money. Compound sets the interest rates algorithmically, so if there’s higher demand to borrow a cryptocurrency, the interest rates will be pushed higher. DeFi lending is collateral-based, meaning in order to take out a loan, a user needs to put up collateral — often ether, the token that powers Ethereum. That means users don’t give out their identity or associated credit score to take out a loan, which is how normal, nonDeFi loans operate.

Ethereum & Defi

Most applications that call themselves “DeFi” are built on top of Ethereum, the world’s secondlargest cryptocurrency platform, which sets itself apart from the Bitcoin platform in that it’s easier to use to build other types of decentralized applications beyond simple transactions. This is because Ethereum’s platform for smart contracts — which automatically execute transactions if certain conditions are met — offers much more flexibility. Ethereum programming languages, such as Solidity, are specifically designed for creating and deploying such smart contracts.

Decentralized Finance

Bitcoin & Defi

While Ethereum is top dog in the DeFi world, many proponents of Bitcoin share the goal of cutting the middleman out of more complex financial transactions, and they’ve developed ways to do so using the Bitcoin protocol.

Companies such as DG Labs and Suredbits, for instance, are working on a Bitcoin DeFi technology called discreet log contracts (DLC). DLC offers a way to execute more complex financial contracts, such as derivatives, with the help of Bitcoin. One use case of DLC is to pay out bitcoin to someone only if certain future conditions are met.

SNX

Synthetix is an Ethereum-based deFi ecosystem that acts as a decentralized exchange (DEX) and as an issuer of assets. It is maintained through an incentive system in the form of staking. Users can speculate on any real asset by creating synthetic assets that track their real-time prices via oracle feeds. Unlike traditional financial systems, Synthetix does not require KYC. So, you do not even need to set up an account. Still, anyone could get exposure to Tesla stocks, high premium bonds, real estate, and just about anything. This can be done simply by depositing SNX tokens on the platform. Besides, those who coin synthetic assets can earn a passive income from the fees generated by these assets’ buyers. One of the most exciting aspects of the Syntethix system is that it can withdraw a huge amount of the trillions of dollars of assets from traditional markets and bring them into the Ethereum network.

SNX is the utility feature of the Synthetix ecosystem and is necessary to create synthetic assets, so-called synths. Users can purchase SNX tokens from various crypto exchanges and place them in a compatible wallet to store them.Once they are staked, new synths can be minted. The token was deflationary until it was updated in March 2019. The update introduced an inflationary monetary policy to encourage stakeholders to create more synths.

A total of 250 million SNX tokens will be minted by 2025. The SNX price has celebrated a dramatic success in recent months. It rose quickly from $0.79 at the beginning of June to around $4.64 in mid-November 2020.

Decentralized Finance

Synth tokens

Synth tokens are synthetic assets that replicate the price of real assets. As we have just learned, they are characterized by the staking of SNX tokens.Synths can be in any form and are designated with “s.” For example, variants of synths are sAAPL (synthetic Apple), sTSLA (synthetic Tesla), sAu (synthetic gold), sBNB (synthetic Binance coin), sDEFI (synthetic DeFi index) and others.

Whenever new synths are minted, Staker creates a debt. Therefore, they have to pay back the same value to synths before they can withdraw their locked SNX tokens. The value of Synths is also likely to change over time, especially when it comes to investments that are subject to a constantly changing price, such as stocks. As a result, users may have to pay a different number of Synths than they initially received to withdraw their clocked SNX tokens. Fortunately, users do not have to trade in the same Synth type that was originally coined. As long as the Synth used for payment has the same market value, it will be accepted by the system. For example, a Tesla Share Synth can be used instead of a Bitcoin Synth for exchange as long as they have the same value. It should be noted here that the Synth tokens do not exactly match the assets they represent. They are known as synthetic assets for a reason. For example, if you hold a sAAPL token, you are exposed to Apple stock’s volatility. However, unlike holding genuine AAPL shares, you will not benefit from genuine Apple shareholders’ dividends.

Collateralization

The Synthetix system requires a collateralization rate of 750%. For example, if you want to mint 100 sUSDT, you must deposit SNX tokens worth $750 as collateral. This rather high collateralization rate is imposed to protect the platform against extreme market price fluctuations.

Decentralized Finance

AAVE

Aave is a decentralized finance protocol that allows people to lend and borrow crypto. Lenders earn interest by depositing digital assets into specially created liquidity pools. Borrowers can then use their crypto as collateral to take out a flash loan using this liquidity. Aave was originally known as ETHLend when it launched in November 2017, but the rebranding to Aave happened in September 2018. It provides holders with discounted fees on the platform, and it also serves as a governance token — giving owners a say in the future development of the protocol.

Aave has several unique selling points when compared with competitors in an increasingly crowded market. During the DeFi craze in the summer of 2020, it was one of the biggest projects in terms of the total value of crypto locked in its protocol. The project allows people to borrow and lend in about 20 cryptocurrencies, meaning that users have a greater amount of choice. One of Aave’s flagship products are “flash loans,” which have been billed as the first uncollateralized loan option in the DeFi space. There’s a catch: they must be paid back within the same transaction. Another big selling point is how those who borrow through Aave can alternate between fixed and variable interest rates. While fixed rates can provide some certainty about costs during times of volatility in the crypto markets, variable rates can come in handy if the borrower thinks that prices will fall in the near future.

Circulation is linked to the total value locked on Aave, as tokens are burned whenever the protocol gathers fees. An initial coin offering was held in November 2017, where $16.2 million was raised by selling one billion AAVE tokens at a rate equivalent to $0.0162 a piece. At the time, 23% of AAVE tokens were assigned to its founders and project. AAVE tokens have been built based on the ERC-20 standard, and they are designed to be deflationary. In the event of a shortfall in the DeFi protocol, staked tokens would be used as collateral as a last resort. In July 2020, Aave unveiled plans to hold a token swap.

Reference:

  1. https://www.gemini.com/cryptopedia/nft-non-fungible-token-crypto-collectibles
  2. https://www.coindesk.com/what-is-defi
  3. https://medium.com/coinmonks/what-is-synthetix-everything-you-need-to-know-about-one-of-theleading-defi-protocols-bc19bdd2949c
  4. https://morioh.com/p/98cc8fe0de28
  5. 2. https://www.coindesk.com/what-is-defi 3. https://medium.com/coinmonks/what-is-synthetix-everything-you-need-to-know-about-one-of-theleading-defi-protocols-bc19bdd2949c 4. https://morioh.com/p/98cc8fe0de28

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DarkByte Research

DarkByte Research

Quantitative Research Fintech start-up focused on Blockchain