What is DeFi, A.K.A. Crypto’s New Financial System?
In case you didn’t know, cryptocurrency is innovating at a furious pace. And the latest technology being developed has the power to radically disrupt our financial system — perhaps sooner than you think. Decentralized finance (DeFi) is the agreed upon name for this crypto-native financial system that does not require intermediaries such as brokerages, exchanges, or banks to facilitate transactions. DeFi functions through smart contracts that are hosted on the blockchain that allow lending, borrowing, trading, and more.
The advantages of DeFi are pictured below
Making a fully decentralized system required a lot of extra work, but we can see that it has advantages over the traditional financial system. For instance, DeFi is fully transparent and equally accessible, among many other positive properties. The blockchains used the most for DeFi are ethereum, binance smart chain, and polygon. DeFi is very quickly becoming more than just an experiment — as evidence we can use DeFiPulse to graph the total value locked into a leading lending platform called Compound.
From the graph we can see that a negligible amount of money was on the platform from Oct. 2018 — June 2020. However, in the “DeFi summer” of 2020 interest began to rapidly peak. During this time DeFi began to see heavy adoption from crypto enthusiasts because of the utility it offered. Users were coming to Compound and using their ethereum as collateral to gain leverage or sell lesser coins short.
Over the following year the total value locked into the Compound protocol underwent exponential growth. In April the platform reached breached $10B locked. And it wasn’t just Compound that has seen eye-popping adoption. The largest decentralized exchange platform, Uniswap, saw their daily trade volume grow from an average of $10M per day to a max of $3.6B over this same period.
Users come to Uniswap to “swap” various tokens that exist on the ethereum blockchain. Many of the traded tokens are associated to projects that provide services on the blockchain. For instance, both Uniswap and Compound have their own “governance” token that represents something like a share in the decentralized organization. The proliferation of services provided on the blockchain has lead to a multitude of tokens being actively invested in and traded. Centralized exchanges have been slow to keep up with this growth and this in turn has helped fuel the rise of Uniswap.
Here is a short list of what exists in DeFi:
- Lending & borrowing via Compound or Aave
- Coin trading via Uniswap
- Algorithmic dollars via Maker
- Insurance via Nexus Mutual
- Derivatives via dYdX
How can you get connected to DeFi?
Follow the steps to download metamask (https://metamask.io/), or visit our website to join the waitlist for a DeFi savings account. Keep posted and we will be writing further in-depth articles about how to best use DeFi to earn interest and more.