Recently, CB insights released its Blockchain 2020 Report, which reviews blockchain as a whole over the past year. Among them, one point is worth noting: DeFi replaced I*O as the primary encryption force in 2019, and hosting, tax and hospitality services continue to enhance their offerings.
So, what is a DeFi?
DeFi (Decentralized Finance) refers to the paradigm of transformation from today’s closed financial system to an open financial economy based on interoperable, programmable and modular open protocols.
Ethereum is creating a new economy that integrates blockchain technology and cryptocurrencies with the current financial system. DeFi is not about creating a new system from scratch, but about using open protocols and transparent data to make the original system more democratic and fair.
DeFi utilizes three key principles of the Ethereum blockchain:
1. Interoperable
Open finance is defined by platforms, which can cooperate with each other with a certain degree of transparency and have complementary functions, breaking the current operating restrictions of closed finance.
2. Programmable
Ethereum enables new financial instruments and assets that are more customizable than existing products and services.
3. Can be combined
Composability is the concept that something can be selected and assembled in multiple combinations. Ethereum proves the value of composability by becoming the underlying protocol for other protocols, such as Maker, UMA, Augur, Compound, etc.
Decentralized finance uses blockchain technology to provide access to traditional financial services to everyone, everywhere, by removing barriers to intermediaries and entry. DeFi applications and services have the potential to revolutionize the financial system, continuously empower individuals and provide greater financial freedom.
A common metric used in DeFi is the amount of money “locked in” or spent by applications and protocols. Similar to how banks and large corporations use capital to create the value of trillions of financial products and derivatives, the Ethereum protocol uses capital to create value for decentralized financial products and applications. The amount of capital stored in these protocols (Ethereum, USD, other assets) is called the amount “locked in DeFi”.
For example, the leading DeFi Maker agreement, with more than $280 million in locked assets as of March 2020; Compound agreement, locking in $70 million in assets.
Data show that assets locked up by decentralized finance (DeFi) platforms have more than doubled since January 2019, from less than $300m to around $700m by the end of the year; It peaked at over $1.2 billion in February 2020, and then dropped to around $600 million today during the CoVID -induced crypto market sell-off.
The breakthrough application of DeFi is the ability to obtain loans without the need for trusted parties or middlemen such as banks or large companies. MakerDAO was one of the first apps that enabled users to get loans from anywhere.
More recently, more types of loan protocols have been added to Ethereum, including Compound, Fulcrum, Aave, and more. Both Compound and Fulcrum create pools of money that allow users to borrow or lend out cryptoassets such as Dai (Maker’s Stablecoin), USDC (Coinbase’s Stablecoin), Ether, and more.
Decentralized exchanges (DEX) provide a new model for trading and exchanging assets without the need to rely on a single intermediary or oligopoly (controlled by a few individuals/companies).
Uniswap is a decentralized exchange (DEX) that trades cryptocurrencies in a disintermediated manner. Data shows that Uniswap transactions exceeded $8 million in November 2019. Uniswap currently accounts for 33% of total DEX (over IDEX and Kyber).
In addition, other DeFi projects worth attention are dYdX,0x, AirSwap, Zerion, TokenSets, Aave, Bancor, Kyber, IDEX, etc.
For now, DeFi is a highly experimental and volatile field, but some companies have planned or are implementing insurance policies and cryptographic hosting services to protect their customers’ property. As a new financial paradigm, we still believe that DeFi has a promising future.
