Decentralized finance, or “DeFi,” is a hot topic in the cryptocurrency space. Ethereum is the most popular blockchain for DeFi applications, with over $13 billion worth of value locked in Ethereum-based DeFi protocols. But what exactly is DeFi? And is Ethereum the best blockchain for DeFi?
In this article, we’ll take a deep dive into the world of DeFi and explore whether Ethereum is indeed the best blockchain for this burgeoning ecosystem.
What is DeFi?
DeFi is a catch-all term for financial protocols and applications that are built on decentralized infrastructure. This includes everything from lending and borrowing platforms to stablecoins and tokenized BTC.
Because they’re built on decentralized infrastructure, DeFi protocols are permissionless and open to anyone with an Internet connection. This is in contrast to traditional finance, which is often centralized and requires permission from a financial institution to access.
The emergence of DeFi protocols has been made possible by three key technologies: smart contracts, decentralized exchanges, and synthetic assets.
Smart contracts are self-executing contracts that live on the Ethereum blockchain. They can be used to create decentralized applications (DApps) that run exactly as programmed and that are not subject to third-party interference or censorship.
Decentralized exchanges (DEXes) are cryptocurrency exchanges that run on decentralized infrastructure. This means that they’re not subject to the same regulations as traditional centralized exchanges, and that they’re much more difficult to hack or shut down.
Synthetic assets are digital assets that are backed by real-world assets. The most popular synthetic asset is Synthetix Network Token (SNX), which is pegged 1:1 with the U.S.
dollar. Synthetic assets allow users to get exposure to real-world assets without actually having to own them.
Why is Ethereum the most popular blockchain for DeFi?
Ethereum is the most popular blockchain for DeFi because it was the first blockchain to enable smart contracts. Smart contracts make it possible to build decentralized applications on Ethereum’s blockchain, which has led to the development of a wide range of DeFi protocols.
In addition, Ethereum’s large and active developer community has been instrumental in building out the ecosystem. Finally, Ethereum’s native token, Ether (ETH), is required to use many DeFi protocols, which gives it a built-in user base and network effect.