Decentralized finance—better known as “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.
Whereas Bitcoin is a decentralized store of value and medium of exchange, DeFi is about turning Ethereum into a programmable money platform—enabling anyone to access financial services that were previously only available through centralized intermediaries. By deploying immutable smart contracts on Ethereum, DeFi developers can launch 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, opportunity, and inclusion.
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 applications 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.
Compound: Compound is an algorithmic money market protocol built on Ethereum that enables users to earn interest on their crypto assets or borrow assets against collateral. Rather than having to go through a centralized lending platform like Celsius Network or Nexo, users can now interact directly with smart contracts to deposit or borrow crypto funds at variable interest rates set by the protocol. Maker: Maker is a decentralized autonomous organization (DAO) on Ethereum that backs and stabilizes the value of the Dai stablecoin through a system of Collateralized Debt Positions (CDPs), risk management incentives, and smart contracts. Users can lock up ETH or other ERC20 tokens as collateral in a CDP to generate Dai, which is pegged to the US dollar at a 1:1 ratio. They can then use Dai to trade or pay fees without having to convert back into ETH or worry about volatility.
Synthetix: Synthetix is a synthetic asset platform that allows users to trade cryptocurrency exposure without actually owning any coins.
Using Synthetix’s synthetic assets (synths), which are backed by collateralized debt positions (CDPs), users can get exposure to price movements in BTC, ETH, gold, silver, oil, and a number of other fiat currencies and commodities without having to actually own any of those underlying assets. This opens up new opportunities for hedging and speculation as well as lending and borrowing against synths using Synthetix’s decentralized exchange (Dex).
Uniswap: Uniswap is a protocol for automated liquidity provision on Ethereum that makes it easy for anyone to trade ERC20 tokens without having to go through a centralized exchange like Binance or Coinbase Pro. Using Uniswap’s interface, users can swap between any two ERC20 tokens in just a few clicks—and all they need is some ETH for gas fees. In addition to providing liquidity for token trades, Uniswap also enables developers to launch their own decentralized exchanges (DEXes) for any ERC20 token using its factory contract. .
These are just some examples for how DeFi differentiates itself from Bitcoin – while Bitcoin focuses on being a store of value and medium of exchange, DeFi focuses on turning Ethereum into a programmable money platform with many applications that were previously only available through centralized intermediaries. 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 – presenting numerous advantages with regard to risk trust opportunity inclusion when compared against traditional fiat financial systems.