EDITED BY Guneet Kaur Published Jul 31, 2023

CURATED BY Kristina lucrezia cornèr Updated Mar 16, 2024

What is DeFi? A beginner's guide to decentralized finance

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What is DeFi (decentralized finance)?

After Bitcoin’s launch in 2009, a robust industry blossomed, stemming from the asset, its concept and its underlying technology. The crypto and blockchain space boasts different niches in which projects and companies develop solutions for various use cases. 

One such niche is the decentralized finance (DeFi) sector, which was created as an alternative to traditional financial services. More specifically, DeFi consists of smart contracts, which, in turn, power decentralized applications (DApps) and protocols. Many of the initial DeFi applications were built on Ethereum, and the majority of the ecosystem’s total value locked (TVL) remains concentrated there. 

At its core, Bitcoin ( BTC ) carries qualities touted as pillars of decentralization. DeFi, however, expands on those qualities, adding additional capabilities.

A subcategory within the broader crypto space, DeFi offers many of the services of the mainstream financial world in a fashion controlled by the masses instead of a central entity or entities. 

Lending may have started it all, but DeFi applications now have many use cases, giving participants access to saving, investing, trading, market-making and more. Decentralized finance’s ultimate goal is to challenge and eventually replace traditional financial services providers. DeFi often harnesses open-source code, allowing anyone the opportunity to build on pre-existing applications in a permissionless, composable manner. 

“Finance” is easy to understand, but what is “decentralization?” In short, decentralization means that no chief body controls something. To an extent, banks and other financial institutions have power over your funds. These entities can freeze your assets, and you are at the mercy of their hours of operation and cash reserves.

The decentralization aspect of DeFi is not only a dispersal of power but also a dispersal of risk. For example, if a company holds all of its customer data in one spot, a hacker needs only to access that particular site for a vast amount of data. In contrast, storing that data across several locations or removing that single point of failure could improve security.

This article will explain what DeFi means, how DeFi works and throw some light on DeFi trading and decentralized banking.

DeFi vs. CeFi (Centralized Finance)

For this comparison, commercial banks will be used as an example. In the traditional world, you may use financial institutions to store your money, borrow capital, earn interest, send transactions, etc. Commercial banks carry a lengthy, proven history of performance. Commercial banks can provide insurance and have security measures in place to ward off and protect against theft. 

On the other hand, such establishments hold and control your assets to a degree. You are limited by banking hours for particular actions, and transactions can be cumbersome, requiring settlement times on the back end. Additionally, commercial banks require specific customer details and identifying documents for participation.

DeFi is a segment that comprises financial products and services that are accessible to anyone with an internet connection and operates without the involvement of banks or any other third-party firms. The decentralized financial market doesn’t sleep and therefore, transactions take place 24/7 in near real-time, while no intermediary has the power to stop them. You can store your crypto on computers, in hardware wallets and elsewhere, and gain access at any time.

Bitcoin and most other cryptocurrencies hold these characteristics due to the underlying technology that backs these assets. Thanks to DeFi’s dependence on blockchain technology, transactions are completed faster, cheaper and — in some cases — more securely than they would with human intervention. Decentralized finance seeks to use crypto technologies to solve a plethora of issues that exist in the traditional financial markets:

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People or companies in centralized finance handle the asset class and processes. However, assets are handled by a collection of smart protocols in decentralized finance. It all boils down to having faith in the people or organization behind the platform. CeFi platforms, like Coinbase.com, are custodial, which means it stores crypto for you. You can, however, utilize a Coinbase wallet in the same way you would a regular cash wallet, giving you complete control over your crypto assets.

Overall, DeFi allows participants the opportunity to access borrowing and lending markets, take long and short positions on cryptocurrencies, earn returns through yield farming, and more. Decentralized finance has the potential to be a game-changer for the 2 billion unbanked people in the world, in particular, who don’t have access to traditional financial services for one reason or another. 

DeFi solutions are built on various blockchains, with the ecosystems composed of participants interacting in a peer-to-peer (P2P) fashion, facilitated via distributed ledger technology and smart contracts, which keep the systems in check. Such results are not bound by geographic borders and do not require identifying documentation for participation. 

The framework for this financial system functions according to programmed rules. Instead of using an intermediary such as a bank to borrow capital, you would send amounts of a specific cryptocurrency to a secure digital location — a smart contract — as collateral for your loan, receiving a different asset in return. Your collateral assets would then sit locked up until you send back the loan amount.

Though you may or may not interact in a straightforward P2P manner when using DeFi solutions, the spirit of the process is P2P, in that third parties are replaced with technology that is not ruled by a central authority.

Related: DeFi vs. CeFi: Comparing decentralized to centralized finance

Why is decentralized finance(DeFi) important?

Through a P2P network, DeFi eliminates intermediaries and permits decentralized banking, which wasn't possible before due to the need to get transactions approved through third parties. The global financial crisis of 2008–09 showed that middlemen cannot be trusted as customers are frequently unaware of the underlying regulations governing financial products and services.

The goal of DeFi is to create an open, trustless and permissionless financial market. Much of the technology in the DeFi space aims to improve the current financial system, potentially improving the user experience (for both businesses and their clients).

How does DeFi work?

Though DeFi is frequently mentioned in connection with cryptocurrencies, it goes beyond the creation of new digital money or value. DeFi's smart contracts are designed to take the place of traditional financial systems.

There are no banks or institutions to manage your money because there are no intermediaries to authorize transactions for DeFi applications. Furthermore, the code is open to anyone's scrutiny, so there's a sense of transparency in DeFi protocols. Also, there are open networks that span national boundaries. There are numerous applications available for users, most of which are built on the Ethereum blockchain .

What makes up decentralized finance(DeFi)?

DeFi boomed in 2020, bringing an influx of projects into the cryptosphere and popularizing a new financial movement. Since Bitcoin essentially holds many DeFi characteristics, no firm start date exists for the inception of the DeFi sector, other than Bitcoin’s launch in 2009. 

Following 2017, however, several ecosystems — such as Compound Finance and MakerDAO — gained prevalence, popularizing additional financial capabilities for crypto and DeFi. In 2020, the DeFi niche took off as additional platforms surfaced, in line with folks harnessing DeFi solutions for strategies such as yield farming. 

Decentralized exchanges (DEXs) 

DEXs allow users to trade digital assets in a noncustodial way without the need for an intermediary or third-party service provider. Although they comprise only one element of the DeFi sector, DEXs have been a part of the overall crypto industry for years. They offer participants the ability to buy and sell digital currency without creating an account on an exchange. 

DEXs let you hold assets away from a centralized platform while still allowing for trading at will from your wallets via transactions that involve blockchains. Automated market makers , a type of DEX, became prevalent in 2020 and use smart contracts and liquidity pools to facilitate the purchase and sale of crypto assets.

DEXs are typically built on top of distinct blockchains, making their compatibility specific to the technology on which they are developed. DEXs built on Ethereum’s blockchain, for example, facilitate the trading of assets built on Ethereum, such as ERC-20 tokens. 

Using DEXs requires having compatible wallets. In general, self-custody crypto wallets let you control your assets, and some of them are compatible with DEXs. However, this type of asset storage puts more responsibility on you for the security of your funds. Additionally, certain DEXs may have fewer features and higher associated financial fees than centralized exchanges.

DEXs have come a long way in terms of liquidity and accumulating a regular user base, which continues to grow. As DEXs become more scalable — that is, faster and more efficient — their trading volumes are expected to increase even more.

Aggregators and wallets

Aggregators are the interfaces by which users interact with the DeFi market. In the most basic sense, they are decentralized asset management platforms that automatically move users’ crypto assets between various yield-farming platforms to generate the highest returns.

Wallets are locations for holding and transacting digital assets. Wallets can store multiple different assets, or just a single asset, and can come in an array of forms, including software, hardware and exchange wallets. Self-hosted wallets — wallets for which you manage your private keys — can be a key component of DeFi, helping to facilitate various DeFi platform uses, depending on the wallet. Exchange-based wallets, in contrast, govern your private keys for you, giving you less control, but also less security responsibility.

Decentralized marketplaces

Decentralized marketplaces represent a core use case for blockchain technology. They put the “peer” in peer-to-peer networks in that they allow users to transact with one another in a trustless way — that is, without the need for an intermediary. The smart contract platform Ethereum is the top blockchain facilitating decentralized marketplaces, but many others exist that allow users to trade or exchange specific assets, such as nonfungible tokens (NFTs) .

Oracles/prediction markets 

Oracles deliver real-world off-chain data to the blockchain via a third-party provider. Oracles have paved the way for the prediction markets on DeFi crypto platforms where users can place bets on the outcome of an event, ranging from elections to price movements, for which the payouts are made via a smart contract-governed automated process.

Layer 1 represents the blockchain that the developers choose to build on. It is where the DeFi applications and protocols are deployed. As discussed, Ethereum is the main layer-1 solution in decentralized finance but there are rivals, including Polkadot ( DOT ), Tezos ( XTZ ), Solana ( SOL ), BNB , and Cosmos ( ATOM ). These solutions will inevitably interact with one another as the DeFi space matures. 

Having DeFi sector solutions run on different blockchains has several potential benefits. Blockchains may be forced to improve speed and lower fees, based on the performance of competing blockchains, creating a competitive environment that potentially results in improved functionality. The existence of different layer-1 blockchains also leaves more room for development and traffic , instead of everyone trying to pile onto a single layer-1 option.

Related: The DeFi Stack: Stablecoins, exchanges, synthetics, money markets, and insurance

DeFi use cases 

To help answer the question “What is DeFi?” it helps to explore its use cases. Whether you want to lend or borrow, trade on DEXs, stake your digital assets, or something else — even games — there are new ways to satisfy those needs. Below is a list of some of the key use cases for decentralized finance.

Lending platforms 

Lending and borrowing have become some of the most popular activities in DeFi. Lending protocols allow users to borrow funds while using their cryptocurrency as collateral. Decentralized finance has seen massive amounts of capital flow through its ecosystem, with lending solutions commanding billions of dollars in total value locked, or TVL — the amount of capital held locked in any solution at a given time.

Payments and stablecoins

For DeFi to qualify as a financial system, comprising transactions and contracts, there must be a stable unit of account, or asset. Participants must be able to expect that the bottom will not fall out in the value of the asset they are using. This is where stablecoins come in. 

Stablecoins bring stability to the activities that are common in the DeFi market, such as lending and borrowing. Considering that stablecoins are generally pegged to a fiat currency, such as the U.S. dollar or the euro, they don’t exhibit nearly as much volatility as cryptocurrencies and therefore are desirable for commerce and trading.

Margin and leverage 

The margin and leverage components take the decentralized finance market to the next level, allowing users to borrow cryptocurrencies on margin using other cryptocurrencies as collateral. In addition, smart contracts can be programmed to include leverage to potentially ramp up the user’s returns. The use of these DeFi components also increases the risk exposure for the user, especially considering that the system is based on algorithms and there is no human component if there is a problem. 

DeFi-native activities 

Liquidity pools are a necessary tool for many decentralized exchanges to facilitate trading. They provide trading liquidity for buyers and sellers, who pay a fee for their transactions. To become part of a pool, liquidity providers can send specific funds to a smart contract and receive pool tokens in return, earning passive profit based on the fees traders pay when they interact with that pool. Pool tokens are the key to getting your deposited funds back.

Sometimes known as liquidity mining, yield farming is another activity in the DeFi space that involves searching for profit via various DeFi projects through participating in liquidity pools. While there are intricacies to yield farming, there is one key reason why market participants are flocking to this phenomenon: It allows you to use your crypto holdings to earn even more crypto.

When yield farming, users lend out their crypto to other users and earn interest that is paid in crypto — usually “governance tokens” that give liquidity providers a say in the operation of the protocol. It is a way for investors to put their crypto to work to enhance returns and is a key innovation in the DeFi market. Yield farming has been dubbed the “Wild West” of DeFi, with market participants hunting down the best strategies that they then often keep close to the vest so as not to tip their hand to other traders and lose the magic.

DeFi risks?

For all its promise, the decentralized finance space remains a nascent market that is still experiencing some growing pains.

DeFi has yet to reach wide-scale adoption , and for it to do so, blockchains must become more scalable. Blockchain infrastructure remains in its early form, much of which is clunky to use for developers and market participants alike. 

On some platforms, transactions move at a snail’s pace and this will continue to be the case until scalability improves, which is the idea behind the development of Ethereum 2.0 , also known as Eth2. Fiat on-ramps to DeFi platforms can also be painfully slow, which threatens to hold back user adoption.

DeFi has grown significantly. Given its youth and innovation, the legal details around DeFi have likely not yet fully materialized. Governments across the globe may aim to fit DeFi into their current regulatory guidelines, or they may construct new laws pertaining to the sector. Conversely, DeFi and its users may already be subject to specific regulations.

In terms of adoption, it is uncertain how exactly things will pan out in the future. One potential outcome might include traditional finance adopting aspects of DeFi while retaining elements of centralization rather than DeFi completely replacing mainstream financial options. Any entirely decentralized solutions, however, may continue to operate outside of mainstream finance.

How do you make money with DeFi?

Depositing your cryptocurrency onto a platform or protocol that will pay you an annual percentage yield is the most straightforward approach to earning a passive income through DeFi . 

Staking is the process of locking tokens into a smart contract in exchange for more of the same token. Yield farming is another way of rewarding yourself with more of the same token or a new token.

Your initial step will be to use a fiat on-ramp to purchase some cryptocurrency (i.e., using cash to buy cryptocurrencies). However, before you proceed with purchasing your crypto, keep in mind that the vast bulk of DeFi is based on the Ethereum blockchain, so BTC is rarely accepted.

Is it safe to invest in DeFi?

In general, the smaller a token's market capitalization is, the riskier it is as an investment. Therefore, look at the liquidity of tokens before committing your funds. Ensure you know how long a DeFi protocol has been in operation and how much money it has in total deposits before you invest. 

You can look at its website to see if the company has taken reasonable steps to reduce its risks. You can also look for news items about the protocol being hacked on the internet and their precautions to prevent it from happening again.

To make it clear, there is no DeFi protocol without risk, but the above considerations can help you to evaluate the investment risk before you put your money into any protocol.

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Amilcar has 10 years of FinTech, blockchain, and crypto startup experience and advises financial institutions, governments, regulators, and startups.

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What Is Decentralized Finance (DeFi)?

Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies.

In the U.S., the Federal Reserve and Securities and Exchange Commission (SEC) define the rules for centralized financial institutions like banks and brokerages, which consumers rely on to access capital and financial services directly. DeFi challenges this centralized financial system by empowering individuals with peer-to-peer transactions.

Key Takeaways

  • Decentralized finance, or DeFi, uses emerging technology to remove third parties and centralized institutions from financial transactions.
  • The components of DeFi are cryptocurrencies, blockchain technology, and software that allow people to transact financially with each other.
  • DeFi is still in its infancy and subject to hacks and thefts because of sloppy programming and a lack of security testing before applications are launched.

Investopedia / Joules Garcia

How Decentralized Finance (DeFi) Works

Through peer-to-peer financial networks, DeFi uses security protocols, connectivity, software, and hardware advancements. This system eliminates intermediaries like banks and other financial service companies. These companies charge businesses and customers for using their services, which are necessary in the current system because it's the only way to make it work. DeFi uses blockchain technology to reduce the need for these intermediaries.

A blockchain is a distributed and secured database or ledger. In the blockchain, transactions are recorded in blocks and verified through automated processes. If a transaction is verified, the block is closed and encrypted; another block is created with information about the previous block, along with information about newer transactions.

The blocks are "chained" together through the information in each proceeding block, giving it the name blockchain . Information in previous blocks cannot be changed without affecting the following blocks, so there is no way to alter a blockchain. This concept, along with other security protocols, provides the secure nature of a blockchain.

Using applications called wallets that can send information to a blockchain, individuals hold private keys to tokens or cryptocurrencies that act like passwords. These keys give them access to virtual tokens that represent value. Ownership of the tokens is transferred by 'sending' an amount to another entity via a wallet, whose wallet, in turn, generates a different private key for them. This secures their ownership of the token, and the blockchain design prevents the transfer from being reversed.

Applications

DeFi applications are designed to communicate with a blockchain, allowing people to use their money for purchases, loans, gifts, trading, or any other way they want without a third party. These applications are programs installed on a device like a personal computer, tablet, or smartphone that make it easier to use. Without the applications, DeFi would still exist, but users would need to be comfortable and familiar with using the command line or terminal in the operating system that runs their device.

DeFi applications provide an interface that automates transactions between users by giving them financial options to choose from. For example, if you want to make a loan to someone and charge them interest, you can select the option on the interface and enter terms like interest or collateral. If you need a loan, you can search for providers, which could range from a bank to an individual who could lend you some cryptocurrency after you agree on terms.

Some applications let you enter parameters for the services you're looking for and match you with another user. Because the blockchain is a global network, you could give or receive financial services to or from anywhere in the world.

Decentralized finance does not provide full anonymity. Transactions do not include an individual's name but are traceable by anyone with the knowledge to do so. This includes governments and law enforcement, which, at times, are necessary for protecting an individual's financial interests.

Goals of Decentralized Finance

Peer-to-peer (P2P) financial transactions are one of the core premises behind DeFi, where two parties agree to exchange cryptocurrency for goods or services without a third party involved.

Using DeFi allows for:

  • Accessibility : Anyone with an internet connection can access a DeFi platform, and transactions occur without geographic restrictions.
  • Low fees and high interest rates : DeFi enables any two parties to negotiate interest rates directly and lend cryptocurrency or money via DeFi networks.
  • Security and Transparency : Smart contracts published on a blockchain and records of completed transactions are available for anyone to review but do not reveal your identity. Blockchains are immutable, meaning they cannot be changed.
  • Autonomy : DeFi platforms don't rely on centralized financial institutions . The decentralized nature of DeFi protocols mitigates the need for and costs of administering financial services.

Peer-to-peer lending under DeFi doesn't mean there won't be any interest and fees. However, it does mean that you'll have many more options since the lender can be anywhere in the world.

DeFi is an all-inclusive term for any application that uses blockchain and cryptocurrency techniques or technology to offer financial services. Some of these applications can provide anything from basic services like savings accounts to more advances services like providing liquidity to businesses or investors. One of the more notable DeFi service providers is Aave, which is a "decentralized non-custodial liquidity market protocol" that allows anyone to participate as a liquidity supplier or borrower.

Aave lets you stake any of your crypto-assets to earn interest income from users who might borrow your assets.

Decentralized finance, originally conceived of as a way to bring financial services like loans and banking to those who don't have access to them , has morphed into an industry where you can take part in many different sectors or endeavors. Here are a few of the most popular:

  • Decentralized exchanges : The top preference for defi app users is accessing decentralized exchanges. Exchanges like Uniswap and PancakeSwap have apps that let you interact with other cryptocurrency users.
  • Liquidity providers : Liquidity is the ability to sell assets quickly, a problem many cryptocurrency users have encountered. Liquidity providers are generally pools where users place funds so exchanges can provide selling opportunities for their users.
  • Lending/Yield Farming: There are hundreds of defi apps available that provide lending. Generally, they operate the same way as a liquidity pool, where users lock their funds in a pool and let others borrow them, receiving interest on their loans—called yield farming. Many provide flash loans, where no collateral is required from the borrower.
  • Gambling/Prediction Markets : Millions of dollars in cryptocurrency are used everyday gambling using defi apps like ZKasino, Horse Racing Slot Keno Roulett, Azuro, and UpvsDown. Prediction markets are platforms that let you place bets on the outcome of nearly any event.
  • NFTs : The market for non-fungible tokens has cooled somewhat, but they are still popular with niche investors and collectors.

Becoming involved in decentralized finance might seem intimidating at first, but there are many ways to do so. The first thing you should do if you want to get into DeFi is to research the activities that interest you the most. You'll need a wallet, but because there are so many to choose from, you'll need to learn more about them and find the one that appeals to you.

Once you identify your wallet and activity, you can find a reputable exchange that provides the activity you want to get involved in or use, buy some cryptocurrency, and get started.

Decentralized finance is constantly evolving. It is unregulated, and its ecosystem is vulnerable to faulty programming, hacks, and scams. For example, one of the main ways hackers and thieves steal cryptocurrency is through weaknesses in DeFi applications.

Laws have not yet caught up with advances in technology. Most current laws were crafted based on the idea of separate financial jurisdictions, each with its own set of laws and rules. DeFi’s borderless transaction ability presents essential questions for this type of regulation. For example:

  • Who is responsible for investigating a financial crime that occurs across borders, protocols, and DeFi apps?
  • Who would enforce the regulations?
  • How would they enforce them?

Just like other blockchain- and cryptocurrency-related projects, businesses, and activities, decentralized finance is subject to considerable hype and misinformation, hoping to attract users and their money. Cryptocurrency, blockchain, and all technologies associated with them are also subject to extreme price volatility.

Lots of Money in Crypto, But Not as Much as You'd Think

There is a considerable amount of money flowing through cryptocurrency exchanges, but it isn't nearly as much as you might be led to believe. Most people still use the traditional financial systems we are all used to. For example, only 0.56% of all money is tied up in cryptocurrency and decentralized finance—a very small figure that should encourage you to do your research to learn if using or investing in DeFi apps, platforms, and cryptocurrency is worth it.

Crypto Winters

A crypto-winter is a period where crypto prices continuously move down and then stay down—sometimes tens of thousands of dollars. The last one occurred between 2022 and 2023. Prices had been rising significantly before 2022 as investors turned to anything they could find following the initial outbreak of COVID-19 and the ensuing pandemic. During that time, they discovered Bitcoin was not only holding value; it was increasing as well—but this was most likely due to their own self-fulfilling prophecies and hype as they drove the price increases themselves.

But toward the end of 2022, prices began declining and stayed there. Billions of dollars were lost during this time. During this period, there were no rumors of substance or any regulatory developments (in the U.S.) beyond a perceived campaign of persecution orchestrated by the Securities and Exchange Commission. However, when rumors began circulating about a Spot Bitcoin ETF approval in October 2023, the hyping began again, and prices rose. When the approval of 11 Bitcoin Spot ETFs was announced in January 2024, prices climbed steadily for a few months (supposedly ending the winter) until a sideways market emerged yet again in March 2024.

Is It Worth It?

DeFi might be just what you're looking for regarding your finances. However, it might not—the decentralized finance industry is still in its infancy and evolving, making it somewhat of a gamble for most people.

The low amount of actual money invested in cryptocurrency and the effects that hype has on prices should make you consider whether investing in decentralized finance is worth it. If you have money you can afford to lose, the space can be very profitable—but the amount of losses can be just as significant.

If you don't have money to lose and are looking for ways to fund your retirement or grow your portfolio or net worth over time, defi and cryptocurrency should be the last investment you should consider. They are still too new and volatile to risk your future on.

What Does Decentralized Finance Do?

The goal of DeFi is to challenge the use of centralized financial institutions and third parties involved in all financial transactions.

Is Bitcoin Part of Decentralized Finance?

Bitcoin is a cryptocurrency. DeFi is designed to use cryptocurrency in its ecosystem, so Bitcoin isn't DeFi as much as it is a part of it.

What Is Total Value Locked in DeFi?

Total value locked (TVL) is the sum of all cryptocurrencies staked, loaned, deposited in a pool, or used for other financial actions across all of DeFi. It can also represent the sum of specific cryptocurrencies used for financial activities, such as ether or bitcoin.

Investing in DeFi involves purchasing a cryptocurrency that is used in DeFi and is susceptible to hacks. DeFi hacking has been an issue for several years, but according to the blockchain analysts at Chainalysis, the trend dropped significantly in 2023. However, this doesn't mean it won't pick back up again. Like all cryptocurrency and blockchain investments, there are significant risks involved.

Decentralized finance (DeFi) is an emerging financial technology that challenges the current centralized banking system. DeFi attempts to eliminate the fees banks and other financial service companies charge while promoting peer-to-peer transactions.

DeFi, like the blockchains and cryptocurrencies it supports, is still in its infancy. Significant hurdles must be overcome before it can replace the existing financial system, which has its own issues that are difficult to resolve. Lastly, financial service companies and banks are not going to be replaced without a fight—if there is a way for them to profit from the transition to a blockchain-based financial system, they will find it and make sure they are part of it.

Aave. " Introduction to Aave ."

Uniswap. " How to Add Liquidity to Uniswap V3 ."

Uniswap. " Pools ."

DappRadar. " Top Gambling Dapps ."

Augur. " Augur: Your Global, No-Limit Betting Platform ."

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  • on October 17, 2020

What is DeFi – Beginner’s Guide to Decentralized Finance

Decentralized Finance (DeFi) has become a buzzword that has introduced a formidable change in the approach about financial transactions. If you are a beginner, read this definitive guide to Decentralized Finance and understand what is DeFi.

Money has been an inevitable aspect of the progress of human civilization since ancient times. Apart from providing a viable instrument to foster financial transactions, money has been a significant symbol of the trust between two parties involved in a specific transaction. The assurance of a tangible commodity for different transactions with money is a formidable reason for which it is practically impossible to think of a world without money.

Cryptocurrencies are taking the world by storm with anticipations suggesting that money, as we know it, might be nearing its end. At this time, one question- ‘what is DeFi” has been gaining prominent attention, in particular. DeFi, or Decentralized Finance, is gradually gaining momentum as one of the hot topics of discussion. The formidable demand for DeFi developers is also one of the reasons for drawing attention to decentralized finance.

So, let us reflect on the meaning of DeFi and insights for understanding DeFi Ecosystem in a simple and better way. The following discussion not only focuses on DeFi meaning but also on the factors that led to the origin of DeFi. Beginners can use this discussion to establish a foundation-level knowledge regarding decentralized finance, beyond the scope of a mere DeFi overview.

Want to learn and understand the scope and purpose of DeFi? Enroll Now in Introduction to DeFi-  Decentralized Finance Course

Definition of DeFi (Decentralized Finance)

Almost every beginner would wonder about ‘what is DeFi’, and it is reasonable. DeFi is the abbreviation for Decentralized Finance, which implies an assortment of financial applications that leverage blockchain networks and technologies. Decentralized Finance or DeFi has introduced a formidable change in viewing financial transactions beyond the existing assumptions of the prevailing, closed financial market.

The potential of DeFi is tailored for shifting the attention towards a financial economy with better transparency. In the supposedly new, open financial economy, financial protocols would rely on three dominant elements: interoperability, programmability, and ease of composing. Decentralized Finance is the architect and leader of the Open Finance movement.

With the Open Finance Movement, users can find alternatives for financial services such as savings, insurance, loans, trading, and many other significant financial activities. The prospects with DeFi applications are expected to surpass the conventional, closed financial applications in terms of scope and reach. First of all, DeFi presents better chances for accessibility to every individual having a two-core dependency.

Two-core dependency implies internet connectivity and devices for accessing a service, such as a computer, smartphone, or tablet. The most crucial factor in an introduction to DeFi would refer to the possibility of leveraging Ethereum for the integration of cryptocurrency, financial systems, and blockchain technology efficiently. Therefore, it is easier to understand that DeFi capitalizes on the existing financial market to ensure better transparency and feasibility of editing for different protocols.

Learn the fundamentals of Decentralized Finance (DeFi) with DeFi Flashcards

Purpose of DeFi (Decentralized Finance)

The next crucial concern for any individual after learning about what is Decentralized Finance is the purpose it serves. It is reasonable to wonder about why DeFi came into existence, and this question becomes quite inevitable in times when decentralized finance is being termed as an unstoppable phenomenon. Therefore, a closer reflection on the origins of DeFi can shed light on what is DeFi and why we need it.

The centralization factor in the traditional marketplace is an evident detail with the influence of governments, also centralized in terms of structure. Therefore, the currency system is also supposed to function through centralized entities such as banks. The centralization factor implies the management and regulation of centralized entities, with absolute control vested in the entities.

Furthermore, a centralized approach also implies higher risk due to the single point of failure. Many questions about the functionalities of centralized entities also create the need to focus on alternatives. For example, the timing of decisions by authorities for printing more currencies and the impact of factors such as financial need or the need for continuity on such decisions are some of the questions that create doubts about the long-term potential of centralized finance systems.

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How did Decentralized Finance Come Into Existence – Origin of DeFi

The understanding of the origins of DeFi takes you beyond the simple answers to what is DeFi. Let us take the example of dollars to understand the pitfalls in centralized entities. The continuously declining value of dollars over the last 50 years shows that it had comparatively higher purchasing power than that in 2020. The inflation in currency value requires you to have more currency for purchasing the same product that you could have purchased in the past.

The example of Venezuelan government’s bad monetary policies and their impact on an all-time high inflation rate draws attention towards the setbacks of centralized entities. The government further exacerbated the situation through decision to print more currency in event of a drop in oil price. As a result, the 1,000,000% inflation rate created a drastic imbalance in Venezuela’s economy. Banks are also one of the critical factors that have a role in fostering the idea of Decentralized Finance.

Almost all banks provide interest on the savings of a customer in the form of recurring or fixed amounts. However, banks utilize the money of customers for investment in different markets through loans to businesses at higher interest rates. As a result, banks gain larger profits from the money of customers while returning a trivial fraction of the profit to the customer.

Annual interest rates worldwide are poised at 2-3%, thereby indicating that customers don’t get the benefits they want by depositing their money in banks. Therefore, customers should find ways to diversify their investments in the share market, schemes, mutual funds, and many other financial instruments. At this point, the importance of what is DeFi becomes evident as banks don’t allow control for customers to diversify their investments.

what is defi infographic

Common Use Cases of Decentralized Finance

Decentrlized Finance emerged as a favorable solution for the setbacks mentioned above in conventional centralized financial systems. It not only takes away the need for central authorities in financial systems but also re-inventing the banking system for providing opportunities to almost every individual. An in-depth reflection on the use cases and benefits of DeFi can help you anticipate the reasons to focus on what is DeFi. Here is an outline of the different common use cases of DeFi .

Open Lending Platforms

The open-source nature of DeFi facilitates exceptional opportunities for open lending protocols. The open lending protocols improve the ease of lending activities in Decentralized Finance. Open lending protocols ensure the collateralization of digital assets, standardization, zero credit checks, and instant transaction settlement.

Furthermore, the hosting of lending services on public blockchains ensures adequate trust in the functionality of these systems. Additionally, the support of cryptographic verification methods, limited counterparty risk, and cost-effective process make Decentralized Finance lending services better than conventional credit systems.

Decentralized Transactions

The use cases of DeFi in a decentralized marketplace also offer prospects for emphasizing on what is DeFi. Decentralized marketplace or DEX platforms remove the need for centralized authorities for holding digital assets for trading. However, centralized marketplaces hold absolute control over digital assets with a central point of failure, thereby increasing the chances of exploitation by hackers. In a DEX platform, the use of smart contracts for automation of trade and other trading tasks reduces the cost and improves trust.

Stablecoins, Insurance, and Mortgages

The use of DeFi for insurance, mortgages, and stablecoins is also another promising example of the emerging common use cases of DeFi. Decentralized Finance provides an ideal basis for fostering the use of the stablecoins market in terms of value concerning fiat money. Decentralized Finance supports insurance activities by removing intermediaries and speeding up the process efficiently. Subsequently, Decentralized Finance could also promote speed and cost reduction in mortgage solutions by leveraging smart contracts.

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Advantages of DeFi (Decentralized Finance)

Now, the next important concern in understanding Decentralized Finance DeFi refers to its benefits. Although there are multiple advantages of DeFi , let us focus on the important mentions that foster the popularity of Decentralized Finance.

No Permissions Required

Decentralized finance presents critical advantages with its permissionless nature. Permissionless finance improves access to financial services and products for people who cannot access centralized finance. At present, 20% of the global population cannot access banking solutions due to various factors. Lack of proper documentation, lack of banking solutions in the geographic location, or bad credit score are reasons that restrict access to banking services.

DeFi takes away these issues and the DeFi decentralized application , MakerDAO , is the perfect example. MakerDAO helps in leveraging Ethereum (ETH) for taking loans. You can deposit ETH on the MakerDAO platform that relies on an automated smart contract solution to manage the complete process. The smart contract enables creating a Collateralized Debt Position (CDP), which helps in obtaining DAI crypto coins.

Flexible Earning Opportunities

The next important benefit of Decentralized Finance that draws attention to what is DeFi is the ability to earn money. Many decentralized apps such as Compound and Dharma allow for driving additional value to the investments in digital assets . These apps can help in utilizing digital assets like DAI or USDC that, in turn, are allowed for other users to borrow. As a result, customers can obtain a better interest in comparison to conventional banking systems.

No Need to Depend on Banks

The facility of improved accessibility in DeFi, in comparison to capital and services, is also a formidable benefit. DeFi takes away the need for dependence on the government’s banking systems, thereby drawing attention towards what is DeFi and why do we need it.

More Opportunities for Innovation

The DeFi ecosystem provides credible prospects for innovation and creation of DeFi services and products. DeFi is an open protocol and can be formidable support for developing a new generation of financial solutions. The DeFi meaning garners higher importance as it can leverage Ethereum and allows innovators to create new decentralized apps for the financial sector.

Improved Open Access with Trust

Transparency is also one of the crucial highlights in the introduction to DeFi, thereby implying towards prospects for testing and trying DeFi apps solutions with ease. Transparency also enables the assurance of a trustless system with ease of use.

Customers are in Control with DeFi

The most critical benefit of DeFi that signifies the need to focus on what is DeFi is the absolute control for customers. Customers can gain complete control over their finances with DeFi, with the flexibility to take decisions about their investments. Therefore, DeFi enables prospects to achieve better interest rates depending on the place of investment.

Want to learn about DeFi applications and how these work? Check here the Top 5 DeFi Applications Presentation Now!

Components of the DeFi Ecosystem

With the understanding of what is DeFi and its importance based on its various use cases and benefits, it is reasonable to think of the overall DeFi ecosystem. The best DeFi projects and a detailed impression of the DeFi ecosystems can help in topping up your understanding of DeFi fundamentals effectively.

The vast DeFi ecosystem contains crucial elements such as open ledger protocols, stable coins, exchange, and open marketplaces, and insurance and investment management platforms, which we have reflected briefly in the earlier parts of this discussion. Speaking of the best DeFi project in common application, MakerDAO comes to the forefront. Let us find in-depth insights into the components in the DeFi ecosystems to understand how it has given rise to many helpful apps that change the way we used to look at financial systems.

Open Ledger Protocols

Open ledger protocols gain prominence in the DeFi landscape due to its open-source nature. The popularity of DeFi projects such as Compound Finance, DAI, or Dharma implies the efficiency in open ledger protocols. The platforms mirror the functions of real banks, allowing users to deposit assets that the system utilizes for borrowing and lending.

The flexibility of DeFi landing platforms is formidable support for achieving better returns on investments along with the assurance of improved control on your investments and returns. The support of smart contracts in automation of lending and borrowing activities in DeFi projects is also a favorable aspect. For example, smart contracts help connect lenders and borrowers, interest management, and documentation of loan terms.

Additionally, you also get the benefit of transparency and removal of central authorities to ensure higher returns with a better understanding of investment risks. Open ledger protocols are an important aspect of understanding DeFi and how public blockchains like Ethereum can help in standardization and global recognition of protocols. As a result, you can find many other benefits of a public blockchain like Ethereum with open ledger protocols.

Some of the notable benefits include the collateralization of digital assets and the integration of digital asset lending and borrowing. The benefits of standardization and interoperability and automation are also evident. You can also notice the benefits of faster and instantaneous transaction settlement through secure lending methods. The limited requirement of KYC or credit checks for accessing financial services with open ledger protocols also present credible advantages.

It is important to understand the risks in DeFi to discover its potential from a neutral perspective. Here’s a guide to Risks in DeFi and how to manage them.

Stablecoins

Stablecoins are formidable components for understanding DeFi ecosystem, as they are compared in terms of value of real-world currency assets. Generally, all stablecoins in the existing DeFi ecosystem are pinned against the US dollar. The primary objective is to ensure better performance, trust, and stability.

The design of stablecoins for maintaining stability compared to cryptocurrencies is also a striking highlight for the DeFi ecosystem. Stablecoins are classified into three different categories, such as fiat-collateralized, non-collateralized, and crypto-collateralized stablecoins with distinct traits and functionalities. Fiat-collateralized stablecoins are pinned against a real currency like US dollar or Euro, thereby providing better assurance of stability.

The same ratio comparison with fiat currency ensures better stability and non-volatility with stablecoins. The commonly accepted fiat-collateralized stablecoins refer to Gemini Dollars, Tether , USDC, and many others. Fiat-collateralized coins also come with certain risks, especially with the requirement of a centralized authority.

Also, you need proper regulations for maintenance and adoption of stablecoins among the general public. Crypto-collateralized stablecoins are similar to fiat-collateralized stablecoins with cryptocurrencies replacing fiat currency . The primary factors that drive stability of crypto-collateralized stablecoins include utility incentives and trustless insurance. One of the prominent examples of crypto-collateralized stablecoin refers to DAI.

Crypto-collateralized stablecoins depend on collateralization, only when the stablecoin slips to debt. The volatility issues with crypto-collateralized stablecoins find a reliable answer by enabling the protocol with lender capabilities. The last type of stablecoins is non-collateralized stablecoins. The striking highlight of non-collateralized stablecoins is the underlying algorithm driving the development of additional tokens. It works in event of the need for ensuring the reduction of token value and maintaining stability.

Decentralized Exchange Platforms

Decentralized exchange or DEX platforms are critical additions in answers to what is Decentralized Finance and the DeFi ecosystem. IDEX is a prominent example of a decentralized exchange. These platforms offer better accessibility to users through partial identity disclosure.

Also, the decentralized exchanges take away the need for storing digital assets. Users should connect their wallets to the exchange and wait for the execution. After the initialization of the trade, smart contracts ensure proper management of the transfer of funds.

Platforms for Managing Insurance Investments

DeFi ecosystem also presents promising opportunities for better investment and insurance platforms. The security token market plays a crucial role in speeding up insurance activities. Polymath is the perfect example of one of the best DeFi projects in this case.

It provides better tools, frameworks, and resources for the creation, management, and publication of security tokens. Many other asset management platforms can also help in better management of trading and risk management.

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Final Words

On a final note, you can notice that Decentralized Finance is the next big thing in revolutionizing financial systems. Learners have the opportunity of uncovering an array of information that showcases its importance in the existing financial landscape. DeFi also presents reliable prospects for the digital transformation of financial systems and improving access to financial instruments with ease.

The growing need for overcoming challenges with traditional financial systems will continue to foster the growth of DeFi ecosystem. So, it is reasonable to anticipate career opportunities with DeFi skills and choose trustworthy learning platforms for career growth. Enroll in DeFi course and take the first step towards learning about Decentralized Finance right now!

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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!

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6 Lesser-Known Built-in Windows Features You Should Use

Microsoft word now has better copilot rewriting tools, the future of ssds: what comes after nvme, quick links, what is defi, centralized finance vs. decentralized finance, how defi works, problems with defi.

Among the coverage of NFTs , Bitcoin, blockchains , and everything else cryptocurrency there is another term that is cropping up more and more: DeFi. What is it, and what does it mean to you?

DeFi stands for "decentralized finance," though it's also known as "open finance." It's a financial system in which middlemen are removed and, like most things associated with Web3 , is a utopian vision of a financial system that operates without a central authority. Instead, transactions would be governed by smart contracts and other peer-to-peer (P2P) technology, most importantly a blockchain.

Related: What Is a "Blockchain"?

As the name suggests, decentralized finance is the opposite of centralized finance, which is the system we now operate under---at least most people do, most of the time. For example, if you buy something from an online store and pay with your credit card, the credit card company (Visa or Mastercard, usually) and your bank act as middlemen before the money ends up in the coffers of the shop you're in.

In the scenario proposed by most proponents of DeFi, instead of using your card, you would use some form of cryptocurrency and circumvent the fees demanded by the credit card company and the bank. However, DeFi would extend to much more than just paying for online goods and services; it aims to take banks out of the equation entirely.

One good example are loans. Currently, to get a loan you need to go to a bank and jump through a number of hoops to qualify. Under DeFi, you could make a deal with somebody online, set down the terms and conditions in a smart contract and then go from there. Instead of dealing with a bank or some other kind of loan company, you'd just deal with another individual.

DeFi hinges on a few things to work, most importantly smart contracts and cryptocurrencies. Instead of the wildly volatile coins most people are familiar with--- Bitcoin springs to mind---most DeFi applications would instead rely on so-called stablecoins like Dai or Tether. These currencies are usually pegged to an existing real-world fiat currency, often the U.S dollar, and generally don't show the crazy spikes upward and downward of Bitcoin.

Related: What Is Bitcoin, and How Does it Work?

Smart contracts are also an interesting new development. The term "contract" is a little misleading as they're not really contracts like in the real world. Instead, they're decentralized apps, or dApps, existing on a blockchain (usually the Ethereum blockchain), self-contained little programs that fire when agreed-upon conditions are met---that's the "smart" bit.

Conditions can be pretty simple, like a payment being transferred every first of the month, but they can be made as esoteric as the signatories would like. However, as these dApps exist on the blockchain, once the deal is made, it can't be altered. If you made a deal to transfer 100 Tether every first of the month, it'll fire every time unless you and your counterparty agree otherwise.

The idea of cutting banks out of the financial equation probably sounds good to anybody who has had to pay some overdraft fee seemingly plucked from out of thin air or anybody else who has ever felt hard done by their bank---which is probably most of us. However, decentralizing your finances comes with a number of practical issues that are hard to ignore.

One big issue is the reliance on cryptocurrency. These currencies are inherently unstable, even stablecoins: Most stablecoins see some fluctuation over time , just not as dramatic as Bitcoin's shifts. Still, it could make a serious difference, especially if the coin you're paying a loan off in gets to be worth more, this would make your loan more expensive, a scary thought.

Another, maybe even bigger issue is that of smart contracts. While they have many benefits, there is the problem of enforcement: if you make a deal with your buddy to lend him $1000 and he doesn't pay you back, you can drag him into court and get the money out of him that way. If somebody doesn't honor their smart contract, you're out of luck--- this paper from Harvard Law goes into the details.

Sure their deed is on the blockchain for all to see, and maybe their reputation takes a hit, but the money is still gone and you can't force payments like you would if you won a court case.

Adding to this issue is the fact that the whole crypto market has become a bit of a cesspool. Scams are common , and it's far too easy to get away with not paying people or otherwise shirking payments and the like.

The upshot is that, as it exists now, DeFi is still very much a playground for people that like risk. If that's not you, you may want to stay away from it for now, and crypto and NFTs in general---check out our article on the problem with NFTs for more on that. That said, if you like the cutting edge, then DeFi might be the place for you.

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DeFi explained: The guide to decentralized finance

What is defi and how does it work what are its benefits and risks forkast.news explains everything you need to know about one of the hottest, most lucrative and controversial crypto trends..

Finance Graph Me

DeFi has been one of the primary drivers of the cryptocurrency resurgence in 2020 and continues to be on a tear through much of 2021 so far. Still, it remains one of the industry’s most opaque areas to the outside world. So, what is DeFi and how does it work? Why has it grown so much this year and has become so influential on the cryptocurrency market in general?

This guide provides an in-depth explanation of these concepts. Below, you can find answers to the following: 

  • DeFi: What it is and how it works
  • What fueled DeFi’s rise?
  • DeFi’s top applications — and notable protocols 
  • Examples: Yearn.Finance and Uniswap 
  • DeFi: benefits
  • DeFi: drawbacks and risks 
  • The future of the industry 

1. DeFi: what it is and how it works

The term “Decentralized Finance” (DeFi) covers financial services carried out on a blockchain. DeFi are financial services with no central authority. It involves taking traditional elements of the financial system and replacing the middleman with a smart contract. We can also describe it as the merger between traditional banking services with blockchain technology, in layman’s terms.

So, for DeFi to work, it needs a decentralized infrastructure to run on. This is where the Ethereum blockchain comes into play. The Ethereum blockchain is a DIY platform for decentralized applications (DApps).

Most DeFi protocols operate on the Ethereum blockchain , although some are now also hosted other competing blockchains, such as the Solana network , to enjoy greater speed and scalability.

2. What fueled DeFi’s rise?

DeFi’s beginning is often traced to MakerDAO, a platform that launched in 2015 that allowed users to use cryptocurrency as collateral for loans. Like traditional cryptocurrencies, DeFi protocols promise to eliminate unnecessary intermediaries. This libertarian view and a desire for investors to make money have fueled the market till now. 

Bitcoin was created in 2009 as an alternative to traditional finance and financial authorities like banks. But while bitcoin was intended to function as money, many limitations still exist. Bitcoin’s functionality depends on a network of new central authorities that keep the wheels turning. These include miners , node operators , wallets and exchanges .

While helpful, these authorities have shown a proclivity for acting like those they came to eradicate. They hold power over several critical aspects. 

These include assets that get listed, customers that can access their services, and more. A genuinely democratized financial ecosystem should be run by the people alone. While Bitcoin has given glimpses of this possibility, it has also fallen short.

There are no central authorities, and protocols are run by smart contracts designed to eliminate foul play. DeFi functions as an open financial network that is trustless and decentralized. This openness has attracted many investors, with the total value of tokens now locked in DeFi protocols exceeding US$165 billion as of this publishing time in September 2021.

3. DeFi’s top applications — and notable protocols 

Now, that we know what DeFi is, let’s look at some of its notable applications.

1. Decentralized exchanges (DEXs)

Decentralized exchanges are exchanges that operate without an intermediary. They are not as popular as their centralized counterparts. 

With DEXs, users can connect directly with one another to buy and sell cryptocurrencies in a trustless environment. Assets traded under DEXs are never held in an escrow or third party wallet, as is done with centralized exchanges. Some top DEXs include Uniswap, Curve and SushiSwap. 

Centralized exchanges, on the other hand, are trading platforms operated by a central authority. Platforms like Binance and Coinbase are popular examples of centralized exchanges. They are custodial in nature. In other words, the buyers and sellers trust the central authority to keep their digital assets safe.

2. Lending Platforms

DeFi proponents say the decentralized lending platforms are democratizing the lending ecosystem. These platforms use smart contracts in place of intermediaries like banks — allowing borrowers and lenders to participate in an open system. Lenders can earn interest on their crypto assets by loaning them out, while borrowers can access liquidity without selling off their assets. 

With the traditional financial system, you need to offer collateral before you can access loans from the bank. This is similar to what happens in DeFi. Borrowers have to over-collateralized their loans by offering assets more valuable than the loan value. Some of the top DeFi lending platforms include Maker, Compound, and Aave.

3. Prediction Markets

A prediction market allows participants to make bets on the outcomes of future events. These platforms function like traditional prediction markets — but with blockchain functionality, which eliminates intermediaries. Examples of DeFi prediction markets are Augur, Gnosis and FTX. Crypto powered prediction markets flourished during the 2020 U.S. presidential elections . Augur recorded a milestone volume of over $8 million. Other platforms like Polymarket and Predictit also saw significant election volumes.

4. Yield farming

Yield farming is the process of locking up cryptocurrencies in exchange for a reward. It’s the hottest new term in the DeFi space. Money markets Compound and Aave are two major platforms to farm DeFi yields. Yield farmers stake popular coins like ether, dai, tether and others.

4. DeFi at work: Yearn.Finance and Uniswap

Yearn.Finance and the YFI token

Yearn. Finance (yearn.finance) is a platform that provides a gateway to other DeFi protocols. It was built by Andre Cronje, a South African financial technologist who found inconsistencies in the yields that several DeFi protocols offered.

The service runs on the Yearn protocol — essentially, a yield optimizer that maximizes yields by allocating liquidity across various DeFi solutions.

The YFI token is the governance token of the Yearn network. Like most DeFi platforms, the decision-making process is powered through token ownership. The more tokens you own, the more sway you have in the voting system. 

It’s an ERC-20 token with a maximum supply of 30,000 tokens. In the beginning, Yearn’s creator gave the tokens out to investors who had deposits in key liquidity pools. 

Since then, the price of YFI has risen astronomically. It even jumped over 270% within five days to become the most expensive cryptocurrency, trading above US$27,000 in August 2020. It’s witnessed some correction over time and is now trading at $17,924, at writing time.

Uniswap: seamless token swaps 

Uniswap is a DeFi protocol built on Ethereum for swapping tokens. Decentralized exchanges solve a multitude of problems that plague centralized exchanges like security breaches and high fees. But, they struggle with liquidity. Uniswap was created to end the issue of liquidity around decentralized exchanges (DEX).

Uniswap is an automated liquidity protocol that doesn’t require an order book to make trades. It relies on liquidity providers and a decentralized pricing mechanism called the Constant Product Market Maker — which is a variant of the Automated Market Maker (AMM) that powers yield farming. AMMs are smart contracts that hold the pool set aside by liquidity providers for traders.

Anyone can list an ERC-20 token on Uniswap. Each token has a smart contract, but not every token has a liquidity pool. 

LPs can create a liquidity pool by depositing an equivalent value of two tokens, say ETH and USDT. Uniswap uses a constant equation: x * y = k to determine pricing. The equation seeks to balance out the value of tokens and their swaps based on how much people want to trade them.

In the equation above, let’s look at a simple ETH/USDT pool. Let’s represent x with the ETH section of the pool and y represent USDT , while k is a constant value that will never change. k represents the total liquidity in the pool. For example, if Ben decides to buy 1 ETH for 500 USDT. What happens in Uniswap is that the supply of ETH falls, while the supply of USDT goes up and the price of ETH rises since there’s less ETH in the pool after the trade and k must always be constant.

5. DeFi benefits 

1. Permissionless

Traditional banks are expensive to run and bureaucratic in nature. They take too long to process transactions and have cut many people out of the financial system due to their stringent requirements. DeFi came to solve many of these issues. Here are some of its benefits.

DeFi opens everyone to the financial system irrespective of income, race, wealth, culture or geographic location. All a user needs is a mobile phone or computer with internet access.

There is a significant number of unbanked people globally. The World Bank estimated in 2018 that 20% of the world’s population lack access to banking services. One reason for this is that most of the unbanked lack much-needed know-your-customer (KYC) documents like state-issued I.D. cards.

Several DeFi platforms allow users to function without any of this. You can take out a Maker loan, for instance, without any identification or credit score.

2. Interest rates for investors

Beyond keeping your wealth like a savings account, DeFi also allows you to earn income. Platforms like Aave and Compound allow you to deposit assets and lend them out to borrowers. At an agreed-upon time, you get your interest and can plow your capital back into the system. 

Compound offers up to 4.3% interest on deposits from some tokens, while Aave is paying out as much as 5.73%. Compared to the 0.6% to 0.7% currently offered by traditional banks for savings accounts, it’s not difficult to see why some people are shifting their assets to DeFi. 

3. Control over your own finances

With DeFi platforms, you remain in control of your finances. While you have to deposit your funds into the platform, you decide what happens to them. Instead of trusting human intermediaries to qualify you for a loan or decide how to manage your investments, a smart contract does that.

No one can ban you from a DeFi protocol. The underlying smart contract is law, and it operates blindly. 

4. Heightened transparency

DeFi enables a greater level of openness and accessibility. Since most DeFi protocols are built on the blockchain — a public ledger — all activities are available to the public. Anyone can view transactions, but these accounts are not tied to anyone directly as is the case with traditional banks. Instead, accounts are pseudo-anonymous, listing only numerical addresses. Users with programming knowledge can also access most DeFi products’ source code to audit or build upon since they’re open source. Open-source codes are far more secure and of higher quality than proprietary software, thanks to community interaction.

6. DeFi drawbacks and security risks 

1. Security issues with smart contracts

What are smart contracts , and what is their role in DeFi? Smart contracts form the backbone of any DeFi protocol. But they are susceptible to manipulation. 

By default, smart contracts are open-source. This design allows prospective users to review them before investing in the DeFi protocol. Most DeFi protocols give their smart contracts to security firms to audit. This is where the problem begins. It’s not unusual for humans to miss flaws in these contracts, which could be exploited in the future. 

Take The DAO , for example. The digital “Decentralized Autonomous Organization” was an investor-directed venture capital fund of sorts that launched in April 2016 and grew quickly to become the biggest crowdfunding platform, managing about $120 million. However, by June that same year, hackers found a vulnerability in the smart contract and stole about a third of its funds. They moved the funds into a “child DAO,” which had the same structure as the parent protocol. Users couldn’t access their funds for weeks, making this perhaps the largest hack in crowdfunding history.

There have been several refunds since then, allowing investors with residual DAO tokens to get some compensation. However, the incident sparked an awakening in the DeFi space. Now, developers who build protocols ensure that their smart contracts go through multiple audit rounds 

2. Data feed centralization

Blockchain protocols can’t access off-chain data. To remedy this, many of them use oracles — third-party services that provide access to external information. Oracles serve as bridges between blockchains and the outside world, relaying information to smart contracts for them to utilize. 

The major issue with oracles is creating a central point of trust into trustless and decentralized setups. This centrality provides a vulnerability for the entire smart contract. When an oracle broadcasts the wrong information, the consequences could be dire. 

Take the case of Synthetix — a DeFi asset issuance platform. On June 25, 2019, an oracle transmitted false price feed data to the platform’s smart contract. A user’s trading bot took advantage of this and inflated the user’s balance. This allowed the user to convert this balance to about 37 million Synthetic ETH (sETH) tokens (worth $70 million at the time). Synthetix confirmed that they reached out to the user, who agreed to reverse the transaction in exchange for an unspecified bug bounty. 

3. Bad actors

In September, the top crypto exchange KuCoin confirmed that it had suffered a hack that saw $150 million in bitcoin and ERC-20 tokens transferred from its hot wallets. Days after the event occurred, blockchain intelligence software Elliptic crunched the numbers and found that the exchange had actually lost about $281 million. 

The report added that the hackers had been laundering the funds through DeFi protocols Uniswap, Kyber Network and others. As Elliptic explained, many centralized exchanges had frozen the hackers’ accounts, preventing them from moving their funds. However, in DEXs, the hackers found the perfect conduits — platforms with no central authorities to freeze their funds.

7. The future of the industry 

DeFi’s performance in 2020 has put the entire crypto market on notice. With assets locked increasing in value, even some traditional crypto companies are looking to cash in on the hype. 

According to DeFi Llama , the total value locked in DeFi now exceeds US$165 billion. This is a 770% rise since January this year and more than 19,000% increase since the start of 2020. 

Unfortunately, DeFi’s boom has attracted a bevy of malicious actors. Recent data from crypto analytics firm CipherTrace reported that total losses from DeFi thefts so far in 2020 is $100 million. And it’s rising. In the second half of 2020 alone, 50% of all cryptocurrency thefts were from DeFi protocols. Centralized exchange KuCoin also had about $19 million liquidated by thieves via decentralized exchanges.

CipherTrace believes that DeFi’s growth made it a prime target for cybercriminals, most of whom understood some of its technical limitations and could take advantage of them. 

The DeFi industry faces the same growing pains as the crypto space as a whole. It’s still in its infancy with plenty of room for growth. But, despite the benefits and returns, it’s still a risky endeavor for the average investor.

Author profile

Jimmy is a U.K.-based freelance journalist covering blockchain and cryptocurrencies. When not immersed in the daily events in the crypto scene, he can be found watching legal reruns or trying to beat his Scrabble high score.

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What is DeFi?

By Kevin Roose March 18, 2022

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The Latecomer’s Guide to Crypto

Kevin Roose

This is part of “ The Latecomer’s Guide to Crypto ,” a mega-F.A.Q. about cryptocurrency and its offshoots. Kevin Roose, a Times technology columnist, is answering some of the most frequently asked questions he gets about NFTs , DAOs , web3 and other crypto concepts.

DeFi (pronounced dee-fye) is short for decentralized finance. It’s an umbrella term for the part of the crypto universe that is geared toward building a new, internet-native financial system, using blockchains to replace traditional intermediaries and trust mechanisms.

I am falling asleep.

Don’t! I promise it’s interesting.

OK, I’ll give it a chance. What do you mean by “using blockchains to replace traditional intermediaries and trust mechanisms?”

Let’s back up a bit. To send or receive money in the traditional financial system you need intermediaries, like banks or stock exchanges. And in order to feel comfortable doing the transaction, all parties need to trust that those intermediaries will act fairly and honestly.

In DeFi, those middlemen are replaced by software. Instead of transacting through banks and stock exchanges, people trade directly with one another, with blockchain-based “smart contracts” doing the work of making markets, settling trades and ensuring that the entire process is fair and trustworthy.

So DeFi is crypto’s version of a stock exchange?

That’s part of it. But DeFi also includes things like lending platforms, prediction markets, options and derivatives.

Basically, crypto people are building their own version of Wall Street — one that is largely decentralized and deals exclusively in crypto, with crypto versions of many of the products offered by traditional financial firms, and without much of the red tape and regulations that govern the existing financial system.

Wild West Wall Street! OK, now I’m interested. How big is DeFi?

DeFi’s total value locked or T.V.L. — a standard way of measuring the value of crypto held in DeFi projects — is currently about $77 billion, according to DeFi Pulse . That would make DeFi something like the 38th largest bank in the United States by deposits, if it were a bank.

So not huge, but not small either.

Right. And T.V.L. isn’t the only way to measure DeFi’s growth. You could also look at trading activity on decentralized exchanges, which has grown by triple-digit percentages in the past year.

Or you could take a cue from regulators and politicians, who are increasingly looking to DeFi’s growth with concern. Michael Hsu, the acting U.S. comptroller of the currency, said in a speech at a blockchain conference in September that many DeFi products reminded him of the credit default swaps and other complex derivatives that were popular on Wall Street in the years leading up to the 2008 financial crisis.

And Senator Elizabeth Warren, the Massachusetts Democrat, singled out DeFi in a December crypto hearing, calling it “the most dangerous part of the crypto world.”

Why are people so worried about DeFi?

In short, because DeFi is mostly unregulated, with few of the consumer protections and safeguards that exist in the traditional financial system.

Can you give me an example of something that would be regulated in the traditional financial system, but isn’t regulated in DeFi?

The best example is probably stablecoins. Stablecoins are cryptocurrencies whose value is pegged to the value of a government-backed currency, like the U.S. dollar.

Stablecoins are a critical part of DeFi markets, because if you’re a crypto investor, you don’t want to constantly be changing tokens back and forth to dollars, or keeping all your assets in cryptocurrencies whose values might fluctuate wildly. You want a crypto coin that behaves like a boring, stable dollar, which you can use without needing to interact at all with the TradFi system.

It’s what DeFi people jokingly call traditional finance.

Clever. So, back to stablecoins. What’s dangerous about them?

Well, regulators have argued that despite the name, stablecoins aren’t actually that stable.

As my colleague, Jeanna Smialek, explained in an article on stablecoins last year, the worry stems from the fact that stablecoin issuers aren’t legally required to back their coins one-to-one with safe, cash-like assets. Investors who buy stablecoins might reasonably assume that each USD Coin or Tether (the two most popular stablecoins pegged to the U.S. dollar) is worth $1, and that they will be able to redeem their stablecoins for actual dollars whenever they want.

But there’s nothing in the law, at present, that requires stablecoin issuers to have one-to-one backing. And if they don’t have enough reserves to cover the stablecoins they’re issuing, the whole thing could collapse if enough investors decide to pull their money out all at once.

That sounds bad!

It would be, especially since stablecoins are the backbone of DeFi trading. And there are questions among investors and regulators about whether some of the leading stablecoin issuers actually have enough assets to pay out their holders, in the event of a large-scale redemption.

So stablecoins might not be stable. What else is potentially worrisome about DeFi?

The crypto firms that issue loans, credit cards and savings accounts, without many of the protections or safeguards offered by conventional banks, are also drawing concern. Regulators in the United States have begun clamping down on firms that issue these products, saying they could represent a risk to consumers.

Regulators are also looking into decentralized exchanges , or DEXs, which allow users to swap crypto tokens with the help of market-making algorithms.

And then there are all the hacks and scams …

Yeah. DeFi, like crypto in general, is a big target for fraud. More than $10 billion was lost to hacks and scams in DeFi projects in 2021 alone, according to a report from the blockchain analytics firm Elliptic.

There typically isn’t much recourse for victims of DeFi scams. And unlike deposits in a regular bank, which are insured by the F.D.I.C., crypto tokens usually can’t be replaced or recovered once they’re gone.

So, let me get this straight. One of the fastest-growing areas of crypto is a Wild West version of Wall Street where there are no investor protections, where the things that are called “stablecoins” might not be stable, and where your money could be irreversibly stolen at any time?

That’s an unflatteringly phrased but largely accurate summary!

Why would anyone sign up for this?

Four reasons.

First, many people like DeFi because it’s so new and unregulated. Building an entirely new financial system from scratch is the kind of intellectual challenge that doesn’t come around every day, and lots of people are attracted to the sector’s wide open, blank slate potential. Plus, if you’re a clever trader or an experienced financial engineer, you could do all kinds of things in DeFi that you couldn’t do in the traditional financial system, and potentially make a lot of money very quickly.

Second, many DeFi fans argue that blockchains are technologically superior to the existing banking system, much of which runs on ancient databases and outdated code. (Most bank transactions, for example, still rely on programs written in COBOL , a programming language that dates back to the 1960s.) Crypto, they say, is the first form of money that is actually devised for the internet, and as it grows, it will need a new, internet-native financial system to support it.

Third, if you’ve bought into the crypto/web3 vision of a decentralized economy, DeFi is the financial architecture that makes all of the things you’re excited about possible. There’s no way, in the traditional financial system, for a DAO to create a membership token out of thin air and use it to raise millions of dollars. You can’t call up JPMorgan Chase or Goldman Sachs and ask them to give you a quote for Smooth Love Potion , priced in Dogecoin. (Well, you could, but they might have you committed.) But with DeFi platforms, you can find people who are willing to trade almost any crypto asset for almost any other crypto asset, with no central entity’s approval needed.

And fourth, there’s a more idealistic cohort of DeFi fans who see all of this heading in a much more utopian direction.

Decentralizing finance, these people say, could help fix what’s wrong with our current financial system, in part by eroding the power of big Wall Street banks over our economy and markets.

How would that work?

These optimists contend that because DeFi replaces human intermediaries and trust mechanisms with public blockchains and open-source software, it’s cheaper (fewer fees), more efficient (faster transaction times) and more transparent (less opportunity for corruption) than the traditional financial system.

They say it democratizes investing, placing tools in people’s hands that only professional investors had access to before. And because you can participate in crypto anonymously and without a bank’s approval, they say, DeFi is a way to provide financial services to people who aren’t well-served by the conventional banking sector, and avoid many of the discriminatory practices that have kept minorities from accessing financial services in the past.

Ultimately, the optimists say, DeFi will become safer and more robust over time, as more people use it and some of the early problems are ironed out. And just as they believe that web3 will replace greedy tech platforms with user-owned collectives, they believe that DeFi will replace today’s banks and brokerages with a better, fairer system.

That sounds great, but I’m still worried. Didn’t we learn our lesson in 2008 about the dangers of unregulated finance? Could DeFi bring about the next financial crisis?

Right now, it’s unlikely that DeFi could produce any disasters on the scale of the 2008 financial crisis. It’s still a relatively small piece of the crypto world (which is a relatively small piece of the overall economy), and many of the people pouring money into DeFi are the kind of deep-pocketed investors who could absorb even big losses.

But the possibility that DeFi could grow big enough to present a systemic risk isn’t lost on regulators, who are scrambling to make the Wild West of crypto a little less wild.

https://www.nytimes.com/interactive/2022/03/18/technology/nft-guide.html

“Finance 3.0: DeFi, Dapps, and the Promise of Decentralized Disruption” Kevin Werbach, a professor at the Wharton School of the University of Pennsylvania, makes the case that DeFi will revolutionize the world of finance by “eliminating costly and controlling intermediaries from financial transactions.”

“Anyone Seen Tether’s Billions?” Bloomberg’s report on the mysterious dollar reserves of Tether, the stablecoin at the heart of the DeFi economy, helps explain why regulators are worried.

“The Defiant” This independent media company’s daily DeFi newsletter is an industry must-read.

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Blockchain Use Cases

Blockchain for Decentralized Finance (DeFi)

Millions of people across the globe are using the Ethereum blockchain to build and participate in a new economic system that is powered by code and setting new standards for financial access, opportunity, and trust. Here’s your complete guide to the exciting new world of DeFi.

What Is Decentralized Finance (DeFi)?

What are the benefits of decentralized finance, what are the use cases for decentralized finance, asset management, compliance and kyt, data and analytics, derivatives, developer and infrastructure tooling, lending and borrowing, margin trading, marketplaces, prediction markets, stablecoins, synthetic assets, tokenization.

  • Find the latest DeFi and Web3 reports here.

Decentralized finance—often called DeFi—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Now with over $13 billion worth of value locked in Ethereum smart contracts, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.

“We are a stone’s throw away from the global financial industry running on a common software infrastructure.” –Lex Sokolin, Global Fintech Co-Head of Consensys

Whereas our traditional financial system runs on centralized infrastructure that is managed by central authorities, institutions, and intermediaries, decentralized finance is powered by code that is running on the decentralized infrastructure of the Ethereum blockchain. By deploying immutable smart contracts on Ethereum, DeFi developers can launch financial protocols and platforms that run exactly as programmed and that are available to anyone with an Internet connection.

The breakthrough of DeFi is that crypto assets can now be put to use in ways not possible with fiat or “real world” assets. Decentralized exchanges, synthetic assets, and flash loans are completely novel applications that can only exist on blockchains. This paradigm shift in financial infrastructure presents a number of advantages with regard to risk, trust, and opportunity.

Decentralized finance leverages key principles of the Ethereum blockchain to increase financial security and transparency, unlock liquidity and growth opportunities, and support an integrated and standardized economic system.

Programmability.

Highly programmable smart contracts automate execution and enable the creation of new financial instruments and digital assets.

Immutability.

Tamper-proof data coordination across a blockchain’s decentralized architecture increases security and auditability.

Interoperability.

Ethereum’s composable software stack ensures that DeFi protocols and applications are built to integrate and complement one another. With DeFi, developers and product teams have the flexibility to build on top of existing protocols, customize interfaces, and integrate third-party applications. For this reason, people often call DeFi protocols “money legos.”

Transparency.

On the public Ethereum blockchain, every transaction is broadcast to and verified by other users on the network (note: Ethereum addresses are encrypted keys that are pseudo-anonymous). This level of transparency around transaction data not only allows for rich data analysis but also ensures that network activity is available to any user. Ethereum and the DeFi protocols running on it are also built with open source code that is available for anyone to view, audit, and build upon.

Permissionless.

Unlike traditional finance, DeFi is defined by its open, permissionless access: anyone with a crypto wallet and an Internet connection, regardless of their geography and often without any minimum amount of funds required, can access DeFi applications built on Ethereum.

Self-Custody.

By using Web3 wallets like

to interact with permissionless financial applications and protocols, DeFi market participants always keep custody of their assets and control of their personal data.

From DAOs to synthetic assets, decentralized finance protocols have unlocked a world of new economic activity and opportunity for users across the globe. The comprehensive list of use cases below is proof that DeFi is much more than an emerging ecosystem of projects. Rather, it’s a wholesale and integrated effort to build a parallel financial system on Ethereum that rivals centralized services because it is profoundly more accessible, resilient, and transparent.

With DeFi protocols, you are the custodian of your own crypto funds. Crypto wallets like MetaMask , Gnosis Safe , and Argent help you easily and securely interact with decentralized applications to do everything from buying, selling, and transferring crypto to earning interest on your digital assets. In the DeFi space, you own your data: MetaMask, for example, stores your seed phrase, passwords, and private keys in an encrypted format locally on your device so that only you have access to your accounts and data.

The game changes for organizations that have heightened institutional-grade requirements for allocation capital into DeFi. For these organizations, wallets like MetaMask Institutional facilitate cryptoeconomic research, pre- and post-trade compliance, best trade execution, reporting, and of course, crypto custody.

In traditional finance, compliance around anti-money laundering (AML) and countering-the-financing-of-terrorism (CFT) relies on know-your-customer (KYC) guidelines. In the DeFi space, Ethereum’s decentralized infrastructure enables next-generation compliance analysis around the behavior of participating addresses rather than participant identity. These know-your-transaction (KYT), such as those provided by MetaMask Institutional , help assess risk in real-time and protect against fraud and financial crimes.

A DAO is a decentralized autonomous organization that cooperates according to transparent rules encoded on the Ethereum blockchain, eliminating the need for a centralized, administrative entity . Several popular protocols in the DeFi space, such Maker and Compound , have launched DAOs to fundraise, manage financial operations, and decentralize governance to the community.

Because of their unprecedented transparency around transaction data and network activity, DeFi protocols offer unique advantages for data discovery, analysis, and decision-making around financial opportunities and risk management. The explosive growth of new DeFi applications has spurred the development of numerous tools and dashboards, such as DeFi Pulse , that help users track the value locked in DeFi protocols, assess platform risk, and compare yield and liquidity.

Ethereum-based smart contracts enable the creation of tokenized derivatives whose value is derived from the performance of an underlying asset and in which counterparty agreements are hardwired in code. DeFi derivatives can represent real-world assets such as fiat currencies, bonds, and commodities, as well as cryptocurrencies.

One of the core design principles of DeFi protocols is composability, meaning different components of a system can easily connect and interoperate. As seen from the wide variety of integrated DeFi applications, composable code has created a powerful network effect in which the community continues to build upon what others have built. Many liken the process of DeFi development to building with legos—hence the increasingly popular nickname “money legos.” From Truffle’s smart contract libraries to Infura’s API suite to Diligence’s security tools , Ethereum developers and product teams are now able to build and launch DeFi protocols with the full-stack tooling and security integrations that they need.

Decentralized exchanges (DEXs) are cryptocurrency exchanges that operate without a central authority, allowing users to transact peer-to-peer and maintain control of their funds. DEXs reduce the risk of price manipulation, as well as hacking and theft, because crypto assets are never in the custody of the exchange itself.

DEXs also give token projects access to liquidity that often rivals centralized exchanges and without any listing fees. Just a few years ago, projects would pay millions of dollars to get a token listed on a centralized exchange.

Some exchanges implement degrees of decentralization, in which centralized servers might host order books and other features but do not hold users’ private keys. Popular DEXs in the DeFi space currently include AirSwap , Liquality , Mesa , Oasis , and Uniswap . Aggregators of DeFi liquidity data, such as MetaMask Swaps , optimize trading experiences by providing DeFi users with unparalleled insight, enabling them to identify the best price quote, coupled with optimal gas prices for the given quote, the lowest failure rates.

The composability of DeFi has unlocked opportunities for product developers to build DeFi protocols directly into platforms across a variety of verticals. Ethereum-based games have become a popular use case for decentralized finance because of their built-in economies and innovative incentive models. PoolTogether , for example, is a no-loss audited savings lottery that enables users to purchase digital tickets by depositing the DAI stablecoin, which is then pooled together and lent to the Compound money market protocol to earn interest.

defi presentation

PoolTogether is a no-loss, audited savings game powered by Ethereum.

Decentralized finance protocols paired with blockchain-based identity systems are an opportunity to help previously locked-out users access a truly global economic system. DeFi solutions can reduce the collateralization requirements for people who do not have extra funds and help assess users’ creditworthiness via attributes around reputation and financial activity, instead of traditional data points such as home ownership and income. The DeFi space prizes data privacy around personal identifying information, as well as open access. Anyone with an Internet connection can access DeFi applications while maintaining control of their data and assets.

DeFi is still an emerging space with attendant risks around smart contract bugs and breaches. A number of innovative insurance alternatives have come to market to help users buy coverage and protect their holdings. Solutions like Nexus Mutual , for example, provide a Smart Contract Cover that protects against unintended uses of smart contract code.

Peer-to-peer lending and borrowing protocols are some of the most widely used applications in the DeFi ecosystem. Compound , for example, is an algorithmic, autonomous interest rate protocol that integrates with and underlies a long list of DeFi platforms, including PoolTogether, Argent, and Dharma. By providing interest rate markets on Ethereum, Compound allows users to earn interest on crypto that they’ve supplied to the lending pool. The Compound smart contract automatically matches borrowers and lenders and calculates interest rate based on the ratio of borrowed to supplied assets. Compound is a compelling example of the exponential opportunity of the DeFi space: as more products integrate the Compound protocol, more and more crypto assets will be able to earn interest, even when idle.

defi presentation

Compound is an algorithmic, autonomous interest rate protocol.

Whereas margin traders in traditional finance can leverage their trades by borrowing funds from a broker (which then forms the collateral for a loan), DeFi margin trading is powered by decentralized, non-custodial lending protocols, such as Compound and dYdX. Because smart contracts automate traditional brokerage activity, some have begun referring to the rise of “autonomous money markets” in the DeFi ecosystem.

DeFi protocols are supporting an array of online marketplaces that allow users to exchange products and services globally and peer-to-peer—everything from freelance coding gigs to digital collectibles to real-world jewelry and apparel.

Peer-to-peer payment is arguably the foundational use case of the DeFi space and of the blockchain ecosystem at large. Blockchain technology is architected so that users can exchange cryptocurrency securely and directly with one another, without middlemen. DeFi payment solutions are creating a more open economic system for underbanked and unbanked populations and also helping large financial institutions streamline market infrastructure and better serve wholesale and retail customers.

Blockchain-based prediction markets harness the wisdom of the crowd and enable users to vote and trade value on the outcome of events. Market prices then become crowdsourced indicators of the likelihood of an event. Augur , a popular DeFi betting platform, features prediction markets around election results, sports games, economic events, and more.

By plugging into lending pool protocols like Compound, many DeFi apps offer interest-bearing accounts that can earn exponentially more than traditional savings accounts, depending on a dynamic interest rate tied to supply and demand. Popular savings apps include Argent , Dharma , and PoolTogether , a no-loss savings game in which participants get all their money back, whether or not they win.

One DeFi activity that has exploded around these innovative savings mechanisms is “yield farming.” Yield farming refers to users moving their idle crypto assets around in different liquidity protocols to maximize returns. The frenzy of excitement around DeFi yield farming has inspired no shortage of memes 🍠

A stablecoin is any cryptocurrency that is pegged to a stable asset or basket of assets, such as fiat, gold, or other cryptocurrencies. Stablecoins were originally developed to reduce the volatile prices of cryptocurrency and make blockchains a viable payment solution. They are now implemented across the DeFi space for remittance payments, lending and borrowing platforms, and even institutional use cases like central bank digital currency (CBDC).

As the Ethereum network transitions to a Proof of Stake consensus algorithm with Ethereum 2.0 , users will have the opportunity to stake their ETH and earn rewards , either as validators or through staking providers. Staking on Eth2 is analogous to an interest-bearing savings account: stakers receive interest (rewards) for validating blocks on the Ethereum protocol.

Related to stablecoins, synthetic assets are crypto assets that provide exposure to other assets such as gold, fiat currencies, and cryptocurrencies. They are collateralized by tokens locked into Ethereum-based smart contracts, with built-in agreements and incentive mechanisms. The Synthetix protocol, for example, implements a 750% collateralization ratio, which helps the network absorb price shocks.

Tokenization is one of the cornerstones of decentralized finance and a native functionality of the Ethereum blockchain. Tokens not only fuel the network but also unlock a variety of economic possibilities. Simply speaking, a token is a digital asset that is created, issued, and managed on a blockchain. Tokens are designed to be secure and instantly transferable, and they can be programmed with a range of built-in functionalities. From real estate security tokens that represent fractionalized properties to platform-specific tokens that incentivize the use of a particular application, Ethereum-based tokens have emerged as a secure and digital alternative for users across the world to access, trade, and store value.

Trading in the DeFi space encompasses a range of activities, from derivatives trading to margin trading to token swaps, and happens across an ever-growing and integrated network of exchanges, liquidity pools, and marketplaces. Crypto traders on decentralized exchanges benefit from lower exchange fees, faster transaction settlement, and full custody of their assets.

Find the latest DeFi and Web3 reports here .

Introduction to DeFi

: A walkthrough the DeFi principles, and how to get started on popular DeFi protocols.

The Future of Finance: Digital Assets and DeFi : Discover the macro financial and technological trends that are sparking the exponential growth of decentralized finance.

The 100+ Projects Pioneering Decentralized Finance

Decentralized Exchanges vs. Centralized Exchanges

MetaMask

A crypto wallet and gateway to blockchain apps

MetaMask Institutional

The DeFi wallet and Web3 gateway for crypto funds, market makers, and trading desks

NFT experiences and digital collectibles

Codefi

The blockchain application suite powering commerce and finance.

Infura

Instant, scalable API access to the Ethereum and IPFS networks.

Decentralized Finance

Mooc, fall 2022.

link

  • To sign up for the course, please fill in this form .
  • For more information about the course, please also join [email protected] . And stay tuned!
  • For general course content related questions, please join our discord .

Instructors

Christine Parlour
Stanford UCL UIUC UC Berkeley UC Berkeley

Volunteer Teaching Assistant

Kaihua Qin , Liyi Zhou

Lectures: Online, Pre-Recorded (Asynchronous)

Guest Speaker AMAs: Tuesday, 10:00 AM - 11:59 AM Online ( Zoom ) or 438 Soda Hall

Syllabus (subject to change)

Course work.

  • Weekly quizzes
  • Two lab exercises
  • (Optional) Group project

All quizzes are released in parallel with (or shortly after) the corresponding lecture and will be due midnight the following Wednesday. Please remember to complete the quiz each week. Although it’s graded on completion, we encourage you to do your best. The questions are all multiple-choice and there are usually at most 5 per quiz.

Labs 1 and 2 have been released and are available on GitHub here: https://github.com/rdi-berkeley/defi-mooc-lab. If you clone the GitHub repository, please ensure your code remains private. You are expected to complete this lab on an individual basis (not in groups), but can have conceptual discussions with your peers as long as no code is shared. Students in the Haas version of the course are encouraged, but not required, to attempt the labs.

In this exercise, you are expected to implement a smart contract that performs a flash loan and liquidation. For more details, please read through the README.md file in the GitHub repository. Lab 1 is simply a checkpoint on the way to the full contract implementation to ensure that students have their development environment up and running by early next week. The majority of your lab grade will come from your performance in Lab 2.

By November 14th, you should submit a single LiquidationOperator.sol file that successfully performs a Uniswap flash loan (“Lab 1”). Your score out of 5 possible points will be determined like so:

  • 0 points: If your contract fails to compile
  • 2 points: If your contract correctly identifies the Uniswap contract for WETH-USDT pair
  • 4 points: If your contract correctly borrows USDT via a Uniswap flash loan
  • 5 points: If your contract borrows enough USDT to liquidate the Aave loan in Lab 2

Then, by November 21st, complete and submit the full implementation (“Lab 2”). Your submission should be a single LiquidationOperator.sol file, and your score out of 15 possible points will be determined by the actual profit you earn in the test case.

  • 0 points: If your contract fails to compile, fails to liquidate the target account, or fails to pass the assertions.
  • 6 points: If your contract gets a positive number in profit.txt.
  • 12 points: If your contract gets a profit of >= 21 ETH.
  • 13 points: If your contract gets a profit of >= 24 ETH.
  • 14 points: If your contract gets a profit of >= 30 ETH.
  • 15 points: If your contract gets a profit of >= 43 ETH.

Assignment Timeline

Assignment Released Deadline
Group formation 8/30 9/12
Project proposal 9/13 10/03
Assignment 1 ( ) 10/04 10/10
Assignment 2 ( ) 10/18 11/07
Project milestone 10/25 10/31
Lab 1 ( ) ( ) 11/01 11/14
Lab 2 ( ) ( ) 11/08 11/21
Project presentation 11/22 12/05
Project final report 12/06 12/12

Course Completion NFTs

We will distribute NFTs for completion of the course. Below are the rules for different tiers (subject to change):

Honorary Tier : Instructors, guest speakers, fireside chat speakers, TAs, and the most supportive students who help others on Discord and YouTube will be rewarded with special NFTs.

Legendary Tier : Students must:

  • Complete at least 12 quizzes on time (before the following lecture date as specified on the website); and
  • (14 marks) Finish the two assignments by Oct 4th 2022 PST and Oct 10th 2022 PST
  • (36 marks) Finish the two two labs with by Nov 1st 2022 PST and Nov 8th 2022 PST

Ninja Tier : Students must:

  • Complete at least 10 quizzes on time (before Dec 12th 2022 PST); and
  • Summarizing information from certain lectures
  • A postmortem on the learning experience
  • Novel financial services on DeFi, such as flash loans or AMM exchanges.
  • Understanding (2 marks): Displays breadth and/or depth of understanding of the topic
  • Importance (2 marks): Content conveys an important aspect of DeFi to the audience
  • Clarity (3 marks): Explains complex concepts simply, clearly, and accurately
  • References (1 mark): Cite the relevant lecture and reference materials such as research papers properly.

Trailblazer Tier :

  • Students must complete at least 10 quizzes before Dec 31st 2022 PST; and
  • Finish the two assignments with a score of at least 10 out of 14 total points before Dec 31st 2022 PST.

Course Description

The purpose of this class is to bring together students and interdisciplinary experts in Computer Science and Finance to discuss the emerging area of Decentralized Finance (or DeFi). DeFi has experienced an unprecedented growth, with hundreds of projects and a countless stream of financial, distributed systems, and blockchain innovations. The total value locked (TVL) in decentralized finance — a measure of the total value of assets committed to the DeFi ecosystem — has reached over $80 billion. When compared to the traditional centralized finance (CeFi), DeFi offers products and services serving similar financial goals, but critically innovates with novel capabilities such as instantaneous multi-billion USD flash loans. By utilizing blockchain and smart contract technologies, DeFi as a whole aims to provide a new platform for programmable, automated finance services that remove the reliance on central trust and intermediaries.

Our goal is to provide a framework to understand this new area of financial services. For each finance function, we will consider 1) the current intermediated structure, and then b) the DeFi version (actual or proposed) that fulfills the function. Is either one of these optimal? We will evaluate both through the lens of CS and finance. Is the application computable (efficiency, decidable), programmable (automatic)? Is the application welfare-enhancing and stable (not a source of systemic risk). How do the new and old systems interact? We aim for the students to be able to critically evaluate whether a new DeFi protocol is novel and practical. We further will capture the security danger in DeFi, as well as their impact on the underlying consensus security. Lastly, we hope to give an insight into how to program and structure secure and incentive-compatible DeFi applications.

Through the exposure to cutting-edge research as well as remaining open challenges, we hope for our students to quickly integrate into academic as well as industrial projects related to DeFi.

Summarizing, we will cover a broad spectrum of topics, including:

A comprehensive introduction covering a computer science and finance background required for the remainder of the course. We will discuss the basics of decentralized systems, permissionless blockchains, consensus, smart contracts and contrast DeFi to traditional finance.

We will cover the computer science and economic aspects of DeFi assets, and how they link to CeFi through stablecoins. The course will elaborate on DeFi asset exchanges and contrast the traditional limit order book models to automated market makers. Just like in CeFi, debt and derivatives play a fundamental role in DeFi. We’ll dive into the various debt models, such as under- and over-collateralized debt, as well as synthetic assets in DeFi. Insurances, portfolio management and prediction markets form equally crucial elements to a decentralised economy as we will elaborate on. Last but not least, we will show different attempts at measuring and tracking systemic risk and its computability.

To link blockchains with financial information from the real-world, we will provide a deep-dive into oracles. We will discuss decentralized reputation, identities and proof of properties. Because most DeFi is transparently readable, including transaction amounts, fees, dates/times, etc, privacy plays an increasingly important role in DeFi. We will cover various privacy technologies including zero-knowledge proofs and their applications in DeFi. We will also discuss various attempts at how to enforce data ownership, data monetization and valuation as well as controlled use and misuse of data.

A digital economy would not thrive without strong security. We will outline the many past security attacks, introspect a few of them in closer detail and provide recommendations on how to strengthen DeFi security. We will discuss the systemic risks stemming from Miner Extractable Value (MEV) and how MEV can be minimized by design. Decentralized governance provides power to a pseudonymous collective, and we will explore how governance works, and how it may be attacked.

Cryptocurrencies and decentralized finance (DeFi)

  • Makarov & Schoar Final Paper & Online Appendix
  • Gorton Comment
  • Prasad Comment
  • General Discussion
  • Makarov & Schoar Conference Draft
  • Makarov & Schoar Data

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Igor makarov and igor makarov associate professor of finance - london school of economics and political science antoinette schoar antoinette schoar stewart c. myers-horn family professor of finance and entrepreneurship - mit sloan school of management discussants: gary b. gorton and gary b. gorton frederick frank class of 1954 professor of management & professor of finance - yale school of management eswar prasad eswar prasad senior fellow - global economy and development.

March 23, 2022

The paper summarized here is part of the Spring 2022 edition of the  Brookings Papers on Economic Activity (BPEA) , the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. The conference draft of the paper was presented at the  Spring 2022 BPEA conference . The final version was published in the Spring 2022 issue by Johns Hopkins University Press. The recording of the conference session can be found below. Read all papers published in this issue  here . Submit a proposal to present at a future BPEA conference  here .

The fast-growing decentralized finance (DeFi) system—the collection of finance applications built on blockchain technology—holds promise for a new financial architecture that can eliminate the need for traditional intermediaries (such as banks, brokers, and exchanges) and reduce rents (excess profits) in the financial sector. But it also generates formidable challenges for regulators, according to a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on March 24, 2022.

“DeFi applications might have the potential to democratize finance by creating a level playing field among providers of financial products and services,” write the authors—Igor Makarov of the London School of Economics and Antoinette Schoar of the Massachusetts Institute of Technology.

But, they warn in Cryptocurrencies and Decentralized Finance (DeFi) , the reduction of rents might not materialize automatically. Rents are often the result of inherent constraints to competition that arise from network externalities (the phenomenon that the value of a financial service or DeFi app increases as its use becomes more common) and economies of scale. These constraints exist both in the traditional financial system and the new architecture, and thus require careful regulation.

The permissionless and pseudonymous design of DeFi applications can severely limit the ability of regulators to oversee the industry and restrict unscrupulous actors. DeFi generates challenges for enforcing tax and money laundering laws and preventing financial malfeasance, and as a result can create negative spillovers on the rest of the economy.

The paper explains how decentralized finance works and the mechanics behind it, such as the security protocols of different cryptocurrency blockchains and smart contracts (embedded computer code that automatically executes transactions when predetermined conditions are met). The authors lay out potential benefits and challenges of the new system, including the difficulty of providing effective consumer financial protections.

The authors then highlight ways to regulate the DeFi system which would “preserve a majority of features of the blockchain architecture but support accountability and regulatory compliance.” They propose regulatory oversight of validators—the blockchain network participants who ensure the integrity of the blockchain ledger (the decentralized record of transactions) and who are paid in cryptocurrency for verifying transactions. Regulators could certify validators to ensure they check that addresses on cryptocurrency networks belong to certified entities and then only process transactions to and from certified addresses.

“If regulators wait too long, in effect cryptocurrencies and DeFi applications can become too-big-to-regulate.”

How the technology and regulation of the DeFi system evolve has important consequences for the global economy and ultimately to the United States’ standing in it, the authors write. They note that the United States enjoys “significant economic and strategic benefits” from the central role of the dollar and U.S. financial system and conclude, “therefore it is in the U.S. interest to encourage innovation and modern financial technologies but at the same time set standards that protect consumers and maintain the transparency and accountability of the system.”

However, the exponential growth of cryptocurrencies and the growing political clout of the crypto community means time is short for finding regulatory solutions, the authors caution. “If regulators wait too long,” they write, “in effect cryptocurrencies and DeFi applications can become too-big-to-regulate.”

Aknowledgment

David Skidmore authored the summary language for this paper.

Makarov, Igor and Antoinette Schoar. 2022. “Cryptocurrencies and Decentralized Finance (DeFi).”  Brookings Papers on Economic Activity,  Spring. 141-196.

Gorton, Gary. 2022. “Comment on ‘Cryptocurrencies and Decentralized Finance (DeFi)’.” Brookings Papers on Economic Activity,  Spring. 197-205.

Prasad, Eswar. 2022. “Comment on ‘Cryptocurrencies and Decentralized Finance (DeFi)’.” Brookings Papers on Economic Activity,  Spring. 206-212.

Gary Gorton is the Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. He was a cofounder and board member of TNB USA Inc. (The Narrow Bank), which was a Connecticut-based depository institution. The views expressed in the comment are those of the discussant and do not necessarily reflect those of Yale School of Management.

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What Is DeFi? Understanding Decentralized Finance

Published: Jun 13, 2022, 1:28pm

Decentralized finance, also known as DeFi, uses cryptocurrency and blockchain technology to manage financial transactions. DeFi aims to democratize finance by replacing legacy, centralized institutions with peer-to-peer relationships that can provide a full spectrum of financial services, from everyday banking, loans and mortgages, to complicated contractual relationships and asset trading.

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Centralized Finance Today

Today, almost every aspect of banking, lending and trading is managed by centralized systems, operated by governing bodies and gatekeepers. Regular consumers need to deal with a raft of financial middlemen to get access to everything from auto loans and mortgages to trading stocks and bonds.

In Canada, the Office of the Superintendent of Financial Institutions (OFSI) set the rules for the world of banks, insurance companies and pension plans, while investment brokerages are regulated by the Investment Industry Organization of Canada (IIROC) and the federal government amends the rules over time.

As a result, there are few paths for consumers to access capital and financial services directly. They cannot bypass middlemen like banks, exchanges and lenders, who earn a percentage of every financial and banking transaction as profit. We all have to pay to play.

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The New Way: Decentralized Finance

DeFi challenges this centralized financial system by disempowering middlemen and gatekeepers, and empowering everyday people via peer-to-peer exchanges.

“Decentralized finance is an unbundling of traditional finance,” says Rafael Cosman, CEO and co-founder of TrustToken. “DeFi takes the key elements of the work done by banks, exchanges and insurers today—like lending, borrowing and trading—and puts it in the hands of regular people.”

Here’s how that might play out. Today, you might put your savings in an online savings account and earn a 0.50% interest rate on your money. The bank then turns around and lends that money to another customer at 3% interest and pockets the 2.5% profit. With DeFi, people lend their savings directly to others, cutting out that 2.5% profit loss and earn the full 3% return on their money.

You might think, “Hey, I already do this when I send my friends money with Interac e-Transfer.” But you don’t. You still have to have a debit card or bank account linked to those apps to send funds, so these peer-to-peer payments are still reliant on centralized financial middlemen to work.

DeFi Runs on Blockchain

Blockchain and  cryptocurrency  are the core technologies that enable decentralized finance.

When you make a transaction in your conventional checking account, it’s recorded in a private ledger—your banking transaction history—which is owned and managed by a large financial institution. Blockchain is a decentralized, distributed public ledger where financial transactions are recorded in computer code.

When we say that blockchain is distributed, that means all parties using a DeFi application have an identical copy of the public ledger, which records each and every transaction in encrypted code. That secures the system by providing users with anonymity, plus verification of payments and a record of asset ownership that’s (nearly) impossible to alter by fraudulent activity.

When we say blockchain is decentralized, that means there is no middleman or gatekeeper managing the system. Transactions are verified and recorded by parties who use the same blockchain, through a process of solving complex math problems and adding new blocks of transactions to the chain.

Advocates of DeFi assert that the decentralized blockchain makes financial transactions secure and more transparent than the private, opaque systems employed in centralized finance.

How DeFi Is Being Used Now

DeFI is making its way into a wide variety of simple and complex financial transactions. It’s powered by decentralized apps called “dapps,” or other programs called “protocols.” Dapps and protocols handle transactions in the two main cryptocurrencies,  Bitcoin  (BTC) and  Ethereum  (ETH).

While Bitcoin is the more popular  cryptocurrency , Ethereum is much more adaptable to a wider variety of uses, meaning much of the dapp and protocol landscape uses Ethereum-based code.

Here are some of the ways dapps and protocols are already being used:

  • Traditional financial transactions.  Anything from payments, trading securities and insurance, to lending and borrowing are already happening with DeFi.
  • Decentralized exchanges (DEXs) . Right now, most cryptocurrency investors use centralized exchanges like or Gemini. DEXs facilitate peer-to-peer financial transactions and let users retain control over their money.
  • E-wallets.  DeFi developers are creating digital wallets that can operate independently of the largest cryptocurrency exchanges and give investors access to everything from cryptocurrency to blockchain-based games.
  • Stable coins.  While cryptocurrencies are notoriously volatile, stable coins attempt to stabilize their values by tying them to non-cryptocurrencies, like the U.S. dollar.
  • Yield harvesting.  Dubbed the “rocket fuel” of crypto, DeFi makes it possible for speculative investors to lend crypto and potentially reap big rewards when the proprietary coins DeFi borrowing platforms pay them for agreeing to the loan appreciate rapidly.
  • Non-fungible tokens (NFTs).  NFTs create digital assets out of typically non-tradable assets, like videos of slam dunks or the first tweet on Twitter. NFTs commodify the previously uncommodifiable.
  • Flash loans.  These are cryptocurrency loans that borrow and repay funds in the same transaction. Sound counterintuitive? Here’s how it works: Borrowers have the potential to make money by entering into a contract encoded on the Ethereum blockchain—no lawyers needed—that borrows funds, executes a transaction and repays the loan instantly. If the transaction can’t be executed, or it’ll be at a loss, the funds automatically go back to the loaner. If you do make a profit, you can pocket it, minus any interest charges or fees. Think of flash loans as decentralized arbitrage.

The DeFi market gauges adoption by measuring what’s called locked value, which calculates how much money is currently working in different DeFi protocols. At present, the total locked value in DeFi protocols is nearly $43 billion USD.

Adoption of DeFi is powered by the omnipresent nature of blockchain: The same moment a dapp is encoded on the blockchain, it’s globally available. While most centralized financial instruments and technologies roll out slowly over time, governed by the respective rules and regulations of regional economies, dapps exist outside of these rules, increasing their potential reward—and also increasing their risks.

Risks and Downsides of DeFi

DeFi is an emerging phenomenon that comes with many risks. As a recent innovation, decentralized finance has not been stress tested by long or widespread use. In addition, national authorities are taking a harder look at the systems it’s putting in place, with an eye toward regulation. Some of the other risks of DeFi include:

  • No consumer protections.  DeFi has thrived in the absence of rules and regulations. But this also means users may have little recourse should a transaction go foul. In centralized finance, for instance, the Federal Deposit Insurance Corp. (FDIC) reimburses deposit account holders up to $250,000 per account, per institution if a bank fails. Moreover, banks are required by law to hold a certain amount of their capital as reserves, to maintain stability and cash you out of your account any time you need. No similar protections exist in DeFi.
  • Hackers are a threat.  While a blockchain may be nearly impossible to alter, other aspects of DeFi are at large risk of being hacked, which can lead to funds theft or loss. All of decentralized finance’s potential use cases rely on software systems that are vulnerable to hackers.
  • Collateralization.  Collateral is a thing of value used to secure a loan. When you get a mortgage, for instance, the loan is collateralized by the home you’re buying. Nearly all DeFi lending transactions require collateral equal to at least 100% of the value of the loan, if not more. These requirements vastly restrict who is eligible for many types of DeFi loans.
  • Private key requirements.  With DeFi and cryptocurrency, you must secure the wallets used to store your cryptocurrency assets. Wallets are secured with private keys, which are long, unique codes known only to the owner of the wallet. If you lose a private key, you lose access to your funds—there is no way to recover a lost private key.

How to Get Involved with DeFi

If you’d like to learn more about DeFi in a hands-on way, here are a few ways to get started:

Get a Crypto Wallet

“Start by setting up an Ethereum wallet like Metamask, then funding it with Ethereum,” says Cosman. “Self-custody wallets are your ticket to the world of DeFi, but make sure to save your public and private key. Lose these, and you won’t be able to get back into your wallet.”

Trade Digital Assets.

“I recommend trading a small amount of two assets on a decentralized exchange such as Uniswap,” says Doug Schwenk, chairman of Digital Asset Research. “Trying this exercise will help a crypto enthusiast understand the current landscape, but be prepared to lose everything while you’re learning which assets and platforms are best and how to manage risks.”

Look into Stablecoins

“An exciting way to try out DeFi without exposing oneself to the price swings of an underlying asset is to try out TrueFi, which offers competitive returns on stablecoins (AKA dollar-backed tokens, which aren’t subject to price movements),” Cosman says.

The key to any foray into a new financial space is to start slow, stay humble and don’t get ahead of yourself. Keep in mind that digital assets traded in the cryptocurrency and DeFi worlds are fast-moving and there’s significant potential for loss.

The Future of DeFi

From taking out the middleman to turning basketball clips into digital assets with monetary value, DeFi’s future looks bright. That’s why people like Dan Simerman, head of financial relations at IOTA Foundation, a DeFi research and development group, see both the promise and potential of DeFi as far-reaching, even though it’s still in the infancy of its capabilities.

Investors will soon have more independence, which will allow them to “deploy [assets] in creative ways that seem impossible today,” Simerman says. DeFi also carries big implications for the big data sector as it matures to enable new ways to commodify data, Simerman says.

But for all its promise, DeFi has a long road ahead, especially when it comes to uptake by the general public.

“The promise is there,” says Simerman. “It’s up to us to continue educating people about the potential, but we also need to keep working hard to build the tools that will allow people to see it for themselves.”

E. Napoletano is a former registered financial advisor and award-winning author and journalist.

Aaron Broverman is the lead editor of Forbes Advisor Canada. He has over a decade of experience writing in the personal finance space for outlets such as Creditcards.com, creditcardGenius.ca, Yahoo Finance Canada, Nerd Wallet Canada and Greedyrates.ca. He lives in Waterloo, Ontario with his wife and son.

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What is DeFi?

defi presentation

Key takeaways

  • Decentralized finance, or DeFi, is an emerging network of peer-to-peer financial services that uses blockchain technology to facilitate lending, borrowing, staking, and trading.
  • Advocates believe DeFi may revolutionize the traditional financial system by cutting out intermediaries like banks and credit card companies.
  • Skeptics cite regulatory uncertainty, technical complexities, and potential risks of hacks and fraudulent activity.

DeFi advocates have ambitious goals—many of them wish to rewire traditional financial systems like banking and credit card payments. They believe blockchain technology can help replace most, if not all, of the predominant parts of the financial establishment.

How do DeFi advocates plan on achieving this? And why should even the most passionate supporters be cautious right now? Let’s dive in.

What is DeFi and how does it work?

DeFi is an umbrella term for apps, platforms, and organizations that enable users to lend, borrow, stake (we’ll cover more on what staking is shortly), and trade crypto assets.

These functions are accomplished with smart contracts and blockchain technology . Smart contracts are digital contracts that can be programmed so that a predetermined action happens once certain requirements are met.

Here’s an example of how this works. Let’s say Jane wants to take out a loan. Typically, she might apply for one through her bank. With DeFi smart contracts , however, Jane can connect directly with a lender without the need for a bank. That’s because all the logistics of the loan, including the terms and the ability to track repayments, can be programmed into the smart contract.

DeFi aims to apply this way of operating to as many aspects of traditional finance as possible. Advocates think it can provide an open, transparent, and efficient alternative to the established financial system. Anyone with a smartphone or computer can take part, no matter where they’re located. There are no third-party entities that decide who can or can’t participate.

Most DeFi platforms are known as protocols, a term which describes the functions and rules of the service. Users mostly conduct transactions with DApps (short for decentralized applications), which are software-based apps built upon blockchains, most commonly on the Ethereum network . In simple terms, they’re like the apps on your smartphone or computer, but they operate with blockchain technology.

DeFi has gained significant attention in recent years, but the community’s aspiration to disrupt traditional finance faces skepticism for a variety of reasons. Critics warn that many DeFi projects are highly speculative and volatile. Furthermore, unlike traditional finance, DeFi platforms do not offer insurance—users potentially risk losing their investments in the event of a hack or a smart-contract failure. Additional drawbacks, according to skeptics, include regulatory concerns and scalability limitations.

Centralized finance vs. decentralized finance

As you learn about DeFi, you may come across the distinction between centralized finance and decentralized finance . Centralized finance—sometimes referred to as “CeFi” or “TradFi” by the crypto community—describes the world of traditional banks, brokers, insurers, and credit card companies.

Many DeFi supporters think CeFi has shortcomings, including creditworthiness requirements, high fees, lengthy wait times for wire transfers, limitations on access to funds, and other factors. They believe the remedy, of course, is DeFi—an ecosystem where developers are also able to create new products and services without the need for approval from centralized entities.

Yet this also means that DeFi lacks many of the built-in protections that existing centralized finance systems have. These include benefits like regulatory oversight, customer support, and more user-friendly interfaces. In addition, blockchains which host DeFi platforms can become congested, which may lead to higher transaction fees and slower confirmation times.

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What are some DeFi use cases?

DeFi is currently being applied to a variety of financial services. A few of these include:

DeFi in financial services. Image depicts uses for DeFi including payments, lending and borrowing, real estate transactions, decentralized exchanges, yield farming, and staking.

DeFi supporters envision a future where smart contracts can automate payroll, accounts receivable, and royalty payments to ensure accuracy and timeliness. They believe this will also help cut down on the administrative costs required to manage these items.

For skeptics, the decentralized nature of DeFi comes with a lot of risks. For example, unlike centralized financial services, DeFi protocols don’t have customer support. There’s no central team that can resolve disputes or reverse transactions in case of error. This may make using DeFi for significant financial activities (i.e., payroll) riskier or less practical than traditional methods.

Decentralized exchanges (DEXs)

How do DEXs operate? Most crypto trading occurs via centralized exchanges (CEXs). Decentralized exchanges (DEXs), however, aim to allow trading without a centralized authority. They run on smart contracts, which supporters believe can make trading more trustworthy and allow participants to stay anonymous.

However, while decentralization may offer greater privacy, a main trade-off is that there is regulatory uncertainty, which can lead to greater risk of scams and frauds. For example, smart contracts are a relatively new technology and can potentially face technical vulnerabilities. In the last few years, several high profile DeFi protocols have been hacked for over 9 figures in losses. Skeptics believe it’s not worth putting your financial assets on the line assuming these kinds of risks.

Also, since DEXs have fewer participants than CEXs, users may experience lower trading volumes and lower liquidity, in addition to potential price disparities. Furthermore, custody of assets is also directly linked to users’ wallets —instead of an account on a CEX—leading to potential security risks.

Lending and borrowing

Advocates believe DeFi can make it easier for more people to access lending, as approval doesn’t rely on many of the strict criteria required by traditional lenders. DeFi lending involves supplying crypto to protocols which, in turn, can be borrowed in exchange for interest. Borrowers must provide collateral in the form of other crypto assets, which are sometimes worth more than the value of the amount they want to borrow. Why would a borrower do this? Hypothetically it supplies crypto liquidity to a borrower who may not wish to sell the specific crypto assets that are being put up for collateral.

As previously noted, DeFi lending platforms don’t have the typical consumer requirements that exist in traditional finance, which can be a double-edged sword, as those requirements are often implemented to protect the consumer. Additionally, crypto volatility may create unfavorable conditions for both borrowers and lenders.

Traditional lending. Shows visualization of decentralized lending compared with traditional lending.

Yield farming

Yield farming allows participants to earn crypto by supplying liquidity across multiple DEXs to increase returns. Users can choose to lock up their crypto in accounts known as liquidity pools, which helps make trading on DEXs run more smoothly.

However, skeptics note that DeFi products are currently complicated to use, requiring a deeper, more sophisticated knowledge of the crypto landscape and its unique ins and outs. Without technical knowledge of how smart contracts work, less experienced users may be at greater risk of making mistakes, and the slightest errors may result in losing access to their assets forever. In addition, yield volatility on certain platforms can potentially lead to rapid devaluation of returns.

Staking cryptocurrencies is a process that involves committing or “locking up” your crypto assets for specific periods of time to support a blockchain network and confirm transactions. Staking allows users to earn crypto rewards on the amount they lock up. This helps blockchains because the crypto that’s locked contributes to the network’s stability and security.

Still, given that some protocols require staked crypto to be locked up for a predetermined time, users may experience reduced liquidity and flexibility with their assets. In addition, due to the potential security vulnerabilities of smart contracts, stakers may be at risk of losing their locked-up funds.

Real estate transactions

Traditionally, buying and selling real estate can involve multiple intermediaries, which can make the process expensive and slow. DeFi supporters hope that smart contracts can open the door for faster and more cost-efficient transactions that don't need third parties. They also believe they can be used to verify ownership of the property more effectively than existing methods.

Given DeFi is still in its infancy, using it for large transactions like real estate may pose certain challenges, including security risks with smart contracts. In addition, the concept of tokenized real estate on blockchain is fairly new and may create obstacles for buyers and sellers. The property market is highly regulated and tax structures may create greater complexity for transactions, especially across different geographic regions.

What to consider before participating in DeFi

Before using any DeFi protocols, first learn how they work . As mentioned earlier, many of these platforms can be complex and intimidating for new users. For example, most DeFi activities require the use of a crypto wallet , which can be a complicated tool to figure out in and of itself. Remember: Even the slightest mistake could result in losing access to your assets for good. So be sure you‘re confident about how a platform functions before using it.

Also, note that crypto may be more susceptible to market manipulation than securities, and DeFi platforms may be more vulnerable to security concerns than centralized finance platforms. Crypto holders and DeFi users do not benefit from the same regulatory protections applicable to registered securities. Crypto is also not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, meaning you should only buy crypto or interact with DeFi protocols with an amount you're willing to lose.

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Decentralized Finance (DeFi)

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Decentralized Finance PPT Slide 1

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Get your hands on our Decentralized Finance (DeFi) PPT template to describe an emerging digital ecosystem of financial applications in cryptocurrency, built on public blockchain networks that enables financial transactions to occur without intermediaries/third parties. Blockchain developers and entrepreneurs can harness this 100% editable deck to highlight the significance of DeFi in boosting/facilitating innovation, cutting costs, providing safety of transactions, and rendering complete transparency to the users. You can also use this set to discuss the use cases/applications of decentralized finance and how it works.

OurPowerPoint template comes with simple designs to keep your slides well-organized and clutter-free. So, download this presentation now and represent your information in a captivating and meaningful way!

A Picture-Perfect Deck

  • A well-designed diagram with appealing icons presents decentralized finance (DeFi) in a nutshell.
  • A diagrammatic representation of the difference between centralized and decentralized finance has been given through an illustration.
  • A hexagon-shaped pattern with eye-pleasing icons depicts the benefits of decentralized finance.
  • A beautifully designed illustration with gorgeously crafted vectors showcases the highly disruptive properties of the DeFi apps.
  • An illustration presents a diagrammatic overview of the traditional and decentralized financial system.

Distinct Features

  • There is no need of prior experience or extensive editing skills to customize the designs.
  • Download the template and receive lifetime access.
  • Since the set has been carefully designed after meticulous research, there will be no copyright violation. 
  • You can conveniently resize the visual objects without loss of resolution.
  • We provide round-the-clock availability of the customer care desk, warranting steady and consistent support.

Give your slideshow a whole new spin with our completely editable slides. Download them today!

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IMAGES

  1. DeFi Project Presentation

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  2. Decentralized Finance

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  3. PPT

    defi presentation

  4. DeFi Explained

    defi presentation

  5. Introduction To Decentralized Finance Defi Training Ppt

    defi presentation

  6. Tom's Awesome DeFi Presentation on Automated Market Makers (AMM)

    defi presentation

VIDEO

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  2. Ultima DeFi Presentation by Terry James

  3. Présentation défi juin

  4. Présentation du défi moodboard

  5. SwiftDefi Presentation- 79072 47706

  6. ULTIMA DeFi PRESENTATION PART 3

COMMENTS

  1. Introduction to Decentralized Finance (DeFi)

    About Decentralized Finance. Financial systems are really falling behind in terms of transaction settlement, security, privacy, and so on. Cyber attacks and identity thefts are quite common in this industry nowadays. However, blockchain can make things right once and for all. Decentralized finance technology is perfectly capable of handling all ...

  2. What Is DeFi? Explainer on What Is Decentralized Finance

    DeFi is short for "decentralized finance," an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries. DeFi ...

  3. What is DeFi? A beginner's guide to decentralized finance

    DeFi is a segment that comprises financial products and services that are accessible to anyone with an internet connection and operates without the involvement of banks or any other third-party firms.

  4. What Is Decentralized Finance (DeFi) and How Does It Work?

    Decentralized finance (DeFi) is an emerging financial technology that challenges the current centralized banking system. DeFi attempts to eliminate the fees banks and other financial service ...

  5. PDF DeFi Beyond the Hype

    Decentralized Finance (DeFi) is a developing area at the intersection of blockchain, digital assets, and financial services. DeFi protocols seek to disintermediate finance through both familiar and new service arrangements. The market experienced explosive growth beginning in 2020. According to tracking service DeFi Pulse, the value of digital ...

  6. Introduction To Decentralized Finance (DeFi) Course

    Close the Skill Gap. The Introduction To Decentralized Finance (DeFi) course is a credible and effective resource that offers a unique educational tool for everyone interested in learning about decentralized finance. The DeFi course on 101 Blockchains closes the skill gap between DeFi education and real-life practices.

  7. What is DeFi

    DeFi is the abbreviation for Decentralized Finance, which implies an assortment of financial applications that leverage blockchain networks and technologies. Decentralized Finance or DeFi has introduced a formidable change in viewing financial transactions beyond the existing assumptions of the prevailing, closed financial market.

  8. What Is DeFi? Understanding Decentralized Finance

    DeFI is making its way into a wide variety of simple and complex financial transactions. It's powered by decentralized apps called "dapps," or other programs called "protocols.". Dapps ...

  9. What Is DeFi? The Basics of Decentralized Finance

    DeFi stands for "decentralized finance," though it's also known as "open finance." It's a financial system in which middlemen are removed and, like most things associated with Web3, is a utopian vision of a financial system that operates without a central authority. Instead, transactions would be governed by smart contracts and other peer-to ...

  10. What is decentralized finance (DeFi) and how does it work?

    1. DeFi: what it is and how it works. The term "Decentralized Finance" (DeFi) covers financial services carried out on a blockchain. DeFi are financial services with no central authority. It involves taking traditional elements of the financial system and replacing the middleman with a smart contract.

  11. What is DeFi?

    DeFi, like crypto in general, is a big target for fraud. More than $10 billion was lost to hacks and scams in DeFi projects in 2021 alone, according to a report from the blockchain analytics firm ...

  12. Blockchain for Decentralized Finance (DeFi)

    Decentralized finance—often called DeFi—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated ...

  13. Decentralized Finance MOOC

    Project presentation: 11/22: 12/05: Project final report: 12/06: 12/12: Course Completion NFTs. ... DeFi has experienced an unprecedented growth, with hundreds of projects and a countless stream of financial, distributed systems, and blockchain innovations. The total value locked (TVL) in decentralized finance — a measure of the total value ...

  14. Cryptocurrencies and decentralized finance (DeFi)

    "DeFi applications might have the potential to democratize finance by creating a level playing field among providers of financial products and services," write the authors—Igor Makarov of ...

  15. What Is DeFi? Understanding Decentralized Finance

    DeFi aims to democratize finance by replacing legacy, centralized institutions with peer-to-peer relationships that can provide a full spectrum of financial services, from every.

  16. What is decentralized finance (DeFi)?

    Key takeaways. Decentralized finance, or DeFi, is an emerging network of peer-to-peer financial services that uses blockchain technology to facilitate lending, borrowing, staking, and trading. Advocates believe DeFi may revolutionize the traditional financial system by cutting out intermediaries like banks and credit card companies.

  17. Decentralized Finance PowerPoint Template

    16:9. 4:3. Get your hands on our Decentralized Finance (DeFi) PPT template to describe an emerging digital ecosystem of financial applications in cryptocurrency, built on public blockchain networks that enables financial transactions to occur without intermediaries/third parties. Blockchain developers and entrepreneurs can harness this 100% ...

  18. PDF Decentralized Finance (DeFi): Transformative Potential & Associated Risks

    Decentralized lending platforms allow users to deposit collateral in the form of cryptocurrency assets and receive assets, typically dollar-denominated stablecoins, in return.26, 27 Approximately one-fifth of all crypto assets locked in DeFi protocols, worth more than $50 billion, are associated with lending platforms, as figure 2 shows.