Decentralized Finance

= DeFi

Description

Philipp Sandner et al.:

"Decentralized Finance (DeFi) is likely to have a significant impact on how banks operate in the future – and even has the potential to shift the structure of the whole financial system at a macroeconomic level. Before we discuss and substantiate this hypothesis, we would first like to introduce the core concept of DeFi.

Decentralized Finance or “DeFi” in short, is an umbrella term encompassing the vision of a financial system that functions without any intermediaries, such as banks, insurances or clearinghouses, and is operated just by the power of smart contracts. DeFi applications strive to fulfill the services of traditional finance (also coined as Centralized Finance, or just CeFi) – but in a completely permissionless, global and transparent manner.

..

DeFi protocols enable for the first time to borrow or lend money on a large scale between unknown participants and without any intermediaries. Those applications bring lenders and borrowers together and set interest rates automatically in accordance with supply and demand. Moreover, those protocols are truly inclusive, as anybody can interact with them at any time, from any location, and with any amount.

In fact, the recent hype around DeFi applications is largely driven by the advancement of borrowing and lending protocols, such as Compound. In contrast to traditional finance, loans in DeFi are commonly secured by over-collateralization. However, companies such as Aave are currently working on enabling uncollateralized loans similarly to traditional finance. " (https://www.forbes.com/sites/philippsandner/2021/02/22/decentralized-finance-will-change-your-understanding-of-financial-systems/?)

Status

"Since 2020, DeFi is growing at an astonishing pace and billions of USD [1] have been put in the ecosystem. The growth is mainly led by applications (also denominated as protocols) that are built on the Ethereum blockchain."

Examples

• borrowing and lending protocols, such as Compound. In contrast to traditional finance, loans in DeFi are commonly secured by over-collateralization. However, companies such as Aave are currently working on enabling uncollateralized loans similarly to traditional finance.

• Synthetix is a derivatives issuance protocol, which enables the decentral creation and trading of derivatives on assets such as stocks, currencies, and commodities. Also, decentral asset management for cryptocurrencies is evolving.

• Yearn Finance, for example, is an autonomous protocol, which searches for the best yields in the DeFi space and invests automatically for its users.

• Exchanges: Coinbase or Binance (which are centralized organizations) to swap a unit of a cryptocurrency against another.

• with the emergence of decentralized exchanges (DEX), holders of cryptocurrencies no longer need to leave the crypto space for swapping their tokens. A prominent example of a DEX is Uniswap. DEX are composed of smart contracts that hold liquidity reserves and function according to defined pricing mechanisms. Such automated liquidity protocols play a key role in the development of an independent decentralized ecosystem without any CeFi intermediaries.

• An example of decentralized insurance is Nexus Mutual, which offers insurances that cover bugs in smart contracts. Since everything is based on smart contracts in DeFi, vulnerabilities in the code of smart contracts is a fundamental risk for DeFi users.

• Stablecoins are based on blockchain protocols that have the principle of price stability inherently encoded and, thus, fulfill the function of a reserve currency. The introduction of stablecoins set the foundation of the functioning decentralized financial system, as they enable participants to engage with each other without the underlying risk of price volatility

(Source: https://www.forbes.com/sites/philippsandner/2021/02/22/decentralized-finance-will-change-your-understanding-of-financial-systems/?)

More information

• https://defipulse.com/