What is Decentralized Finance?

To understand decentralized finance, the opposite needs to be understood first; centralized finance. The traditional financing methods and institutions regulating finances such as government and banks centralized finance. It’s centralized because the power to control and bring change is confined to a single person or a group of people.

So basically someone sitting in a bulletproof limousine is deciding how much interest you have to pay back for the home loan you took. This is very autonomous and has been understood to be very problematic for the people who fall under these centralizing institutions.

On the contrary, decentralized finance is, well as its name, decentralized. It works on the basis of distributed ledger based on blockchain technology, similar to those used in cryptocurrencies. In the centralized financial system, access to data of transactions is given to very few people who can even alter the data as per their intentions. Unlike centralized finance, transaction data is very transparent and can be accessed easily. Being based on blockchain technology it makes it nearly impossible to bring change in the data and even if one tries to do so, all the data becomes invalid.

Although decentralized finance is better in terms of transparency and security an organization is still needed to regulate it. At its nascence, it is controlled by few but distinct people. As momentum comes along the way, an organization is formed called Decentralized Autonomous Organization (DAO). This organization is a lot more democratic than centralized financing institutions like banks as votes are required to bring any change.

What is Defi 2.0 and how is it better than Defi 1.0?

 

The first version of decentralised finance is popularly known as traditional DeFi or DeFi 1.0. A better, more secure and more transparent version of the traditional DeFi is known as DeFi 2.0. It is the second generation of DeFi which is developed to solve the problems of the first generation of DeFi. DeFi 1.0 was quite inaccessible when it came. For around 10 years it was confined to a limited number of people who used fancy words such as “distributed ledger”, and “fungible” that would make it completely uninvolving to an average human. DeFi 1.0 has suffered from self-imposed sickness.

De-Fi 2.0 is however more accessible and more popular than traditional De-Fi. It also has better covered the flaws of De-Fi 1.0.In De-Fi 1.0, the depositors were given some reward when they deposited the crypto coins they had. The reward was some percentage of the same currency that they deposited. This scheme was quite profitable for the depositors at first, but it exposed them to impermanent loss. Impermanent loss is the condition when more liquidity is provided to a liquidity pool and the currency or coin that is provided to increase liquidity loses its value. The greater the value loss, the greater the risk of impermanent loss.

Asthe liquidity change and value change are directly related and one can easily alter the other, value loss is inevitable when liquidity increases. To counter this problem, De-Fi 2.0 has smart insurance based on smart contracts which checks itself for loopholes or drawbacks. The lost amount is recovered through insurance.

De-Fi 1.0 relies on traditional financing practices, such as providing interest on collateral saved. This might sound quite wholesome and fine, but a huge amount of collateral needed to be deposited. While in the case of De-Fi 2.0, it has created a whole new paradigm of financing. De-Fi 2.0 has got self-repaying loans that use the collateral deposited for yield farming. After the repayment of the loan, this passive income stream brings back all the collateral that went to pay the loan. So basically no one has to pay loans from their own pocket.

What is Olympus DAO then?

Olympus is a decentralized reserve currency agreement based on OHM tokens. To save the OHM from falling, it is backed by crypto assets such as FRAX and DAI to maintain its value. Olympus aims to provide staking and bonding services like financing companies and make OHM a global currency that can be used in everyday transactions.

Staking is a long term service Olympus provides by rewarding OHM to their users. sOHM is provided when a user stakes OHM, which can be used later to redeem OHM by burning sOHM. Bonding is a short term service that enables Olympus to have liquidity and reserve assets like any physical financing institution. Bond sales provide profit which is added to the Olympus treasury so that it can mint OHM and give it out to users who are staking.

A game theory is set up to show the relation between stackers and bonders. These are number-based game theory which is based on the cartesian table.

In the above table, various points are given showing the relation between stackers and bonders which will ultimately affect the price at sales. This is how prices fluctuate in Olympus and how it works.