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Decentralized Finance (DeFi) - What is it?



Decentralized finance (DeFi) or sometimes referred to as Open Finance is drive by a premise of making services such as savings, loans, trading, insurance and more accessible to anyone who has access to a smartphone and internet connection. Smart contracts on blockchains such as Ethereum can execute automatically when certain conditions are met and enable developers to create more sophisticated parameters than just sending or receiving cryptocurrency. This is what is referred to as decentralized apps or "dapps."


How do DeFI dapps differ from traditional banking institutions and the capital markets?

  • Fundamentally, the operations of dapps are not managed by an institution. Instead the rules are written in code (smart contract) and then deployed on the blockchain which then require little to no human intervention.

  • Code is transparent on the blockchain for anyone to audit.

  • Dapps are global

  • Open to all - anyone can use them and anyone can create DeFi apps. It is not restricted to those big financial institutions.

  • DeFi applications can be combined to provide a range of services or products such as decentralized exchanges or stablecoins.

Examples

For example, Uniswap is a cryptocurrency exchange run entirely on smart contracts, letting you trade popular tokens directly from your wallet. This is different from an exchange like Coinbase, which stores your crypto for you and holds your private keys for safekeeping. Uniswap uses an innovative mechanism known as Automated Market Making to automatically settle trades near the market price. In addition to trading, any user can become a liquidity provider, by supplying crypto to the Uniswap contract and earning a share of the exchange fees. This is called “pooling”.


Other popular Decentralized Exchange platforms (DEXes) include 0x, AirSwap, Bancor, Kyber, IDEX, Paradex and Radar Relay. All have slightly different architectures.


Synthetix is a platform that lets users create and exchange synthetic versions of assets like gold, silver, cryptocurrencies and traditional currencies like the Euro. The synthetic assets are backed by excess collateral locked into the Synthetix contracts.


DeFi Governance

Across the DeFi ecosystem, we are also seeing a move towards decentralizing governance and decision-making. Many projects today have master keys for the developers to shut down or disable dapps. This was done to allow for easy upgrades and provide an emergency shutoff valve in case of buggy code. The DeFi community is experimenting with ways to allow stakeholders to vote on decisions, including through the use of blockchain-based Decentralized Autonomous Organizations (DAOs).


Here’s a list of resources you might find helpful:

DeFi Pulse

DeFi Prime

Introducing USDC

Stablecoin Stats

Decentralized Lending


Disclaimer: CV5 Capital does not endorse or promote any of the projects or cryptocurrencies mentinoed in this article. Any descriptions of functionality and services are for information only. CV5 Capital is not responsible for any loss of funds or other damages caused as a result of using projects described above.

All images provided herein are provided by CV5 Capital.



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