What is DeFi? Decentralized Finance introduction and examples
Updated: Apr 14
DeFi stands for Decentralized Finance, which includes decentralized applications (dApps) and services developed on permissionless blockchain systems using smart contracts.
“A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and agreements exist across a distributed, decentralized blockchain network. As a result, the code controls the execution, and transactions are trackable and irreversible.” (https://www.investopedia.com/terms/s/smart-contracts.asp)
The innovation carried forward by smart contracts, and the entire DeFi ecosystem is the interaction among multiple parties without a centralized intermediary or a central authority like banks and institutions, solving the trust problem and reducing the risk of human error. More automation, more security.
The financial system we know today went through decades of technological advances, starting with the introduction of accounting machines and punched cards, the rise of the mainframe computers, and the invention of ATMs and credit cards. Then, in the 1990s, thanks to the growing internet adoption, there was the so-called fintech revolution, with essential characters such as Paypal, Robinhood, Transferwise, and Revolut.
Today, the traditional finance concept is changed thanks to the development of blockchain technology, P2P (peer-to-peer) protocols, and the entire crypto industry.
History of DeFi
No official date can underline the birth of DeFi, but the Bitcoin protocol created by Satoshi Nakamoto in 2009 is its milestone.
This P2P protocol enables decentralized payments worldwide, but its language, called Script, has been limited to creating a wide range of decentralized applications or systems on this chain. With this aim, in 2015, Vitalik Buterin created Ethereum. With its Turing-complete programming language Solidity and the ERC20 standard for creating new tokens, it quickly became a go-to smart contract platform to build on.
In a short time, it became a potential attraction for developers who wanted to build all kinds of decentralized applications (dApps). Many of these DApps can be linked to create complex financial services.
The oldest important DeFi projects on Ethereum were Maker and EtherDelta, but many new projects were born during the exploding mania of ICOs, such as:
A lending and borrowing platform, AAVE
A liquidity protocol for derivates, SYNTHETIX
A protocol for providing access to inter-blockchain liquidity, REN
An on-chain liquidity protocol, KYBER NETWORK
Another on-chain liquidity protocol, BACHOR
An open protocol that enables P2P asset exchange, OX
Key features and use cases
The three most important characteristics of DeFi are:
Developing monetary financial services, such as the issuance of Stablecoin;
Providing P2P and lending platforms;
Enabling advanced financial instruments such as DEX, tokenization platforms, derivatives, and forecasting markets.
Decentralized Finance is open and permissionless, giving this financial system a unique focus on the user. Thanks to its interoperability and modularity, you can do a lot of things:
Stream and send money worldwide
Access stable currencies
Borrow funds with and without collateral
Start crypto savings
DeFi ecosystems and networks
The first ecosystem in which projects have started to appear is Ethereum, but during these years of innovation, other blockchains have been created with this purpose. Among these, there are the two most promising: BSC and Polygon.
BSC, Binance Smart Chain, is a blockchain network that runs applications based on smart contracts. Notable dApps on this network are Pancake Swap, Alpaca Finance, Venus Protocol, AutoFarm, and many more.
Polygon, formerly known as the MATIC network, is a layer-2 scaling solution introduced in 2019 to overcome many restrictions of the Ethereum blockchain, including transaction speed, throughput, and gas prices. A layer-2 solution is a blockchain that operates alongside a mainnet - in this case, Ethereum - but processes transactions outside of it, resulting in increased transaction throughput and lower gas prices.
In 2022 there are many decentralized projects and applications; if you’re curious about which ones are the most promising, read the Best defi project in 2022.
Visit this site for a complete overview of the top blockchain dapps.
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