Decentralized finance, or DeFi for short, is a growing ecosystem of protocols and financial applications built on Ethereum that are designed to offer alternatives to traditional centralized financial services.
The DeFi ecosystem has seen explosive growth in 2020, with the total value locked in DeFi protocols rising from $675 million in January to over $13 billion by November. This growth has been driven by a combination of factors, including the launch of new protocols, the introduction of new use cases, and an influx of users and capital from both the crypto and traditional finance industries.
So what exactly is DeFi? In this post, we’ll take a look at the history of DeFi, its key concepts and components, and some of the most popular protocols and applications in the ecosystem.
Table of Contents
What is DeFi?
DeFi is short for decentralized finance, a catch-all term for financial protocols and platforms that are built on Ethereum (and other blockchain networks) that aim to offer alternatives to traditional centralized financial services.
The DeFi ecosystem is still in its early stages of development, but it already includes a wide range of protocols and applications that cover a broad spectrum of financial use cases, including lending, borrowing, trading, payments, and more.
While the DeFi ecosystem is still relatively small compared to the traditional financial system, it has seen explosive growth in 2020, with the total value locked in DeFi protocols rising from $675 million in January to over $13 billion by November.
This growth has been driven by a combination of factors, including the launch of new protocols, the introduction of new use cases, and an influx of users and capital from both the crypto and traditional finance industries.
What is Ethereum?
Ethereum is a decentralized platform which runs smart contracts: applications that run perfectly as programmed with no chances of cheating or third-party interference.
To build decentralized applications (dapps) on blockchain, ethereum is used. These dapps can be anything from decentralized exchanges (DEXes) and lending platforms to stablecoins and tokenized BTC.
The DeFi ecosystem is primarily built on Ethereum because it is the most mature blockchain platform with the largest developer ecosystem and the most infrastructure (such as wallets, exchanges, and tooling) available.
What are smart contracts?
Smart contracts Where the terms of the agreement between the buyer and seller are written straightly in lines of code are called self-executing contracts. This code is stored on the blockchain and is enforced by the network of computers that run the Ethereum blockchain.
Because smart contracts are stored on the blockchain, they are transparent, auditable, and immutable. This makes them an ideal platform for building financial protocols and applications that need to be trustless and resistant to fraud or tampering.
What is a dapp?
Decentralized application which is runs on a blockchain is A dapp. Dapps are similar to traditional apps, but they are powered by smart contracts instead of a centralized server.
Dapps can be built on any blockchain platform, but the majority of dapps in the DeFi ecosystem are built on Ethereum. This is because Ethereum is the most mature blockchain platform with the largest developer ecosystem and the most infrastructure (such as wallets, exchanges, and tooling) available.
What is a DAO?
A DAO is a decentralized autonomous organization. A DAO is an organization that is run by code (smart contracts) instead of humans. This means that a DAO can operate completely independently of any central authority.
DAOs are often used to fundraise, manage finances, and vote on proposals. The MakerDAO is an example of a popular DAO in the DeFi ecosystem.
What is a decentralized exchange?
A decentralized exchange (DEX) is a type of cryptocurrency exchange that does not require a central authority to match orders. DEXes are powered by smart contracts and typically allow users to trade directly from their wallets.
Because DEXes are decentralized, they are often considered to be more secure than centralized exchanges, which have been hacked in the past. However, DEXes often have lower liquidity and higher fees than their centralized counterparts.
What is a lending platform?
A lending platform is a type of decentralized application that allows users to borrow and lend cryptocurrencies using smart contracts. Lending platforms typically offer interest rates that are much higher than those offered by traditional banks.
What is a stablecoin?
A stablecoin is a type of cryptocurrency that is tied to a static asset like as the US dollar. Stablecoins are designed to minimize price volatility and provide a more stable store of value than other cryptocurrencies.
What is tokenized BTC?
Tokenized BTC is a type of cryptocurrency that is backed by real BTC. Tokenized BTC can be used in DeFi protocols in the same way as regular BTC, but it has the added benefit of being able to be traded on decentralized exchanges.
What can DeFi Development Companies do?
DeFi development companies can help you build decentralized applications (dapps) on Ethereum. They can also help you launch a DAO or develop a lending platform or stablecoin.
If you are looking to launch a DeFi project, contact a reputable DeFi development company today.
Conclusion
DeFi is a rapidly growing ecosystem of decentralized applications built on Ethereum. DeFi protocols offer a wide range of financial services that are often more accessible, transparent, and secure than traditional finance.
If you are looking to launch a DeFi project, contact a reputable DeFi development company today.
