👨🏫Introduction
Cairo Finance is an all-in-one solution offering all DEFI products on one platform with various utilities.
Last updated
Cairo Finance is an all-in-one solution offering all DEFI products on one platform with various utilities.
Last updated
Who is behind CAIRO?
The Cairo Project was created by a team of developers and blockchain enthusiasts! Like all other DeFi Projects, we believe our code is who we are! Thus, we will ensure to provide full transparency and let our code speak for itself.
What is DeFi?
"DeFi stands for decentralized finance. In simple words it stands for self-custody finance. Unlike traditional finance where a company, bank, fund is responsible for your money, in DeFi no one but you has access to it. DeFi has grown into a complete ecosystem of working applications and protocols that deliver value to millions of users. Assets worth over $239 billion were locked in DeFi ecosystems as of April 2022, making it one of the fastest-growing segments in the public blockchain space.
Historically, central authorities have issued currencies that underpin our economies. As people developed trust in those currencies, the power of monetary systems grew. However, trust has been broken repeatedly, making people question the centralized authorities' ability to manage said money. DeFi was developed to create a financial system that is open to everyone and minimizes the need to trust and rely on a central authority.
It’s argued that DeFi started in 2009 with the launch of Bitcoin, the first p2p digital asset built on top of the blockchain network. Bitcoin made it possible to envision a transformation in the traditional financial world. Blockchain technology became an essential next step in decentralizing legacy financial systems. The launch in 2015 of Ethereum and, more specifically, smart contracts made it all possible. The Ethereum network is a second-generation blockchain that maximizes the potential of this technology within the financial industry. It encouraged businesses and enterprises to build and deploy projects that formed the ecosystem of DeFi.
DeFi created many opportunities for a transparent and robust financial system that no single entity controls. In 2017 projects reached a turning point and began to go beyond just money transfers.
Financial markets can enable great ideas and drive the prosperity of society. Still, power in these markets is centralized. When people invest in the current financial system, they relinquish their assets to intermediaries, such as banks and financial institutions. This keeps risk and control at the center of these systems.
Historically, we’ve seen bankers and institutions failing to manage risks in the market. The 2008 financial crisis was a catastrophic illustration of this. Undoubtedly, when central authorities control money, risk accumulates at the center and endangers the system as a whole.
Bitcoin and early cryptocurrencies, which were initially developed to give individuals complete control over their assets, were only decentralized when it came to issuance and storage. Providing access to a broader set of financial instruments remained challenging — until the emergence of smart contracts that made DeFi possible.
How DeFI works
DeFi, previously referred to as "open finance," takes out the middleman in financial transactions. So instead of having your bank or credit card issuer be the intermediary between you and a merchant when you make a purchase, you use the digital currency and have ownership of it to use directly.
Here are the main tenets of DeFi:
There are no intermediaries, so no banks or institutions overseeing your money
There's transparency as the code is available for review by anyone
There are open networks that transcend geographic borders
Here's an overview of the most popular DeFi use cases and protocols available today.
Certain decentralized applications require connecting real-world data to the blockchain. For example, prediction markets treat real-world events, such as elections, as financial products and require the real-world data to be stored on-chain for funds to be released to those who predicted the results.
An oracle connects the blockchain to the outside world. They are often used to send real-world data to the blockchain but can also send data from the blockchain to the real world. In most cases, software oracles that connect to public APIs are used. In some cases, hardware oracles with physical sensors are used to determine things like wind speed.
To weed out “bad data,” protocols often utilize consensus oracles. These oracles aggregate data from various sources and use a consensus mechanism to reach a single data point.
Decentralized lending lets users lend cryptocurrency to others to gain annual yields. Decentralized borrowing allows individuals to borrow money at a specific interest rate. Unlike traditional finance, these DeFi protocols enable peer-to-peer lending, removing the need for intermediaries.
Because DeFi lending protocols use an automated smart contract code to enable loans, users don’t have to wait to get their funds. These protocols also remove the need for credit checks and enable users to borrow cryptocurrency regardless of location. Some decentralized lending platforms offer rate-switching features that let borrowers switch between variable and stable interest rates to protect themselves from volatility.
Although DeFi lending is an ideal solution for many users, it isn’t without risk. Many lending protocols require users to lock their funds in a liquidity pool, making them susceptible to impermanent loss. Flash loans, a type of loan in which funds are borrowed and returned within the same transaction, also can be problematic. They allow DeFi users to borrow large sums of cryptocurrency that might be used to manipulate token prices.
Numerous blockchain-based insurance policies cover real-world scenarios like farming, disasters, and more. Many blockchain-based insurance policies utilize a parametric insurance model in which claims are paid to the party involved as specific parameters are met. These parametric insurance policies often use hardware and software oracles to determine when disbursements should occur. With smart contract technology, disbursements happen automatically rather than relying on a centralized entity to trigger the payment.
Decentralized insurance policies offer numerous advantages over centralized policies. For example, if you had a centralized hurricane insurance policy and a hurricane caused property damage, you would have to go through a lengthy claims process before receiving the funds needed to repair your home. On the other hand, a decentralized policy could utilize smart contracts to pay the total value owed as soon as the damage occurred.
DeFi Insurance also refers to insurance that covers blockchain-related activity. This type of coverage is ideal for those with significant amounts of crypto assets on an exchange. A DeFi insurance policy can cover losses incurred from an exchange hack. Additionally, DeFi insurance can offer security for stablecoin investors in the event of a price crash.
Decentralized Exchanges (DEX) are one of the essential functions of DeFi. DEXs allow users to exchange or swap tokens with other assets without a centralized intermediary or custodian. Traditional exchanges (centralized exchanges) offer similar options, but the investments offered are subject to that exchange's will and costs.
Yield farming is a popular way for cryptocurrency traders to earn passive income on their tokens. Yield farm protocols use smart contracts to lock users’ tokens and pay interest rates on their locked assets. Users who lock tokens on yield farm protocols earn interest based on transaction costs if their funds are used for liquidity and loan interest if their funds are used for DeFi loans.
The rewards paid to traders exist to offset potential risks associated with locking their tokens. Risk exists primarily in the form of impermanent loss, although token volatility and rug pulls are of concern as well.
Sometimes, the pool’s creator manually decides the annual percentage rate. In other cases, the yield farming protocol determines and alters the APR with smart contracts.
Stablecoins
Stablecoins are a viable solution to volatility issues surrounding cryptocurrencies and are helping DeFi gain prominence. The name says it all. Stablecoin value is tied to a relatively stable asset, like gold or the US dollar, to keep its price consistent. Stablecoins became useful during risky moments in the crypto space, providing a haven for investors and traders. Stability makes them a reliable collateral asset. Stablecoins also play an important role in liquidity pools — an integral part of the DeFi ecosystem.
Prediction markets are platforms where individuals can make predictions on the realization of future events. The markets cover things like sports betting, politics, and predictions on stock prices. DeFi opens these markets for participation. The concept of decentralized prediction markets has long been touted as a possibility through smart contracts.
Asset management
Another class of service offered by DeFi is asset management. It intends to make investing faster, less expensive, and more democratized. Aspects of the DeFi ecosystem play very favorably for Asset Management, including transparency, composability, and trustlessness.
Transparency promises to make information accessible and secure. Composable allows users to enjoy hyper-customization of portfolios. Trustless provides access to historically illiquid assets.
We’re observing a quantum leap in the new possibilities of the functionalities of money through the innovation of distributed ledger technologies. For the first time in history, a global financial system for a worldwide population is being shaped by that same population. Anyone can participate in DeFi protocols' governance and get a seat at the table where the world of decentralized finance is actively created.
The DeFi space is gradually catching up with the traditional financial system. Despite some of the obstacles that come with operating on the bleeding edge of innovation, the world of decentralized finance is on the path to prosperity. When Defi and fintech map and merge, we'll have an inflection point where nascent financial technology is just part of a new financial system — one that realizes the dream of being fast, secure, available, and egalitarian.