<aside>
💡 “Fiat is the ultimate of sh*tcoin.”
</aside>
What is Decentralized Finance?
Decentralized Finance through cryptocurrencies promises to make money and payments universally accessible to any person worldwide. They set out to revolutionize and open-source every financial service today - savings, loans, trading, insurance, and more.
Through blockchain technology and smart contracts, financial instruments can self-enforce and cater their service in the free market to anyone.
DeFi at its core:
- Runs on code: i.e., smart contracts, anyone can audit the open source code, thus resulting in true transparency.
- Geography agnostic: Dapps are global from day one.
- Permissionless: Any person can create and participate in these protocols.
- Interoperable: Dapps interact with each other through API connections.
Stablecoins
Stablecoins are cryptocurrencies with stabled prices pegged to FIAT currencies; the most notable projects are pegged to the US Dollar.
Stablecoins have three essential purposes:
- Medium of exchange: the ability to trade goods and services without bartering.
- Store of value: wealth preservation.
- Unit of Account: a measurement tool to define and compare market values
There are three types of stablecoins in the market: Fiat-Backed, crypto-backed, and algorithmic.
- Fiat-Backed Stablecoins are pegged to the underlying fiat currency at a 1:1 ratio. (Tether - USDT and USDC - Circle)
- Crypto-Backed Stablecoins are overcollateralized by underlying crypto assets to account for price volatility. (DAI - Maker DAO)
- Algorithmic Stablecoins do not use fiat or crypto-assets as collateral; instead, they find price stability by using algorithms and smart contracts to expand or contract the supply in circulation based on demand to maintain the peg of 1:1. (UST - Terra LFG)