Decentralized finance is shaking the core of the financial services industry, enabling people to trade, lend, and borrow digital assets from anywhere in the world. DeFi couples the merits of blockchain technology with the most crucial parts of the traditional financial system, creating a solution that offers the best of both worlds.
Decentralized applications can even be chained together, with transactions automatically routed between them through programmable smart contracts. For example, the interest from a lending platform could be redirected to another one to generate even more interest.
Besides just the basics like borrowing and lending, DeFi is also tackling more fundamental issues in the modern financial system, such as financial inclusion, greater liquidity, and lower costs. According to recent estimates, financial services are not accessible to over 1.7 billion people globally. Banks can’t always operate efficiently in every region, creating unreasonably high banking fees that aren’t affordable in that area.
Projects stemming from centralized organizations are generally frowned upon in the DeFi space, and while Tether is the most popular stablecoin by market capitalization, it’s still far more centralized than almost any other widely-held blockchain token. DeFi projects like MakerDAO have brought some control back to distributed networks with DAI, a decentralized stablecoin that isn’t pegged to a fiat currency.
The DeFi space is brimming with innovative ideas and new-age solutions to age-old problems. But decentralized finance wasn’t always like this. Just a few years ago, people were quick to brush DeFi off as infeasible, so its enormous spike in usage over the last year has brought it unprecedented attention.
Like most overnight phenomena, DeFi wasn’t actually the product of short-term progress. Its systems have been in the works since early 2018, and while it’s one of the most profitable arenas in blockchain now, DeFi has far more humble origins.
Before DeFi was called DeFi, a few other names were floating around, but labels like ‘Open Finance’ and ‘Crypto Finance’ simply didn’t convey its goals coherently. Launched as a movement of defiance against traditional systems by a group of companies in early 2018, the name stuck during the first Decentralized Finance Meetup in San Francisco.
Over 150 people appeared at Polychain’s offices for the meetup that day, along with representatives from some of the biggest DeFi platforms today like the Maker Foundation, 0x, dYdX, and Compound. While the growth of DeFi was undoubtedly dependent on these foundational platforms, the Ethereum network may have played an even more crucial role.
The platform that pioneered programmable smart contracts was built from the ground-up to support decentralized financial applications. In its whitepaper, co-founder Vitalik Buterin even predicted the rise of various DApps widely used today.
As the most popular network for smart contracts, decentralized finance naturally gravitated towards Ethereum. Its ability to support many use-cases without a central governing authority has transformed the blockchain space for good. From under $700 million at the start to over $20 billion today, the ETH locked into DeFi platforms has shown remarkable growth over the last year, and it appears to be on a roll.
Bitcoin may have allowed us to conduct transactions without banks, but DeFi lets people conduct business. With countless opportunities to profit, and new ones showing up each day, DeFi is on its way to becoming the face of the blockchain industry.
While DeFi stole the show for the blockchain space, the rest of the world was far more concerned with the ongoing COVID-19 pandemic. The coronavirus has been devastating for the world’s economies, and in fear of widespread depreciation of investments, many people turned to blockchain platforms as a haven.
From staking systems to yield farming, the blockchain space offers quite a few lucrative ways to make a quick buck. Through liquidity mining, traders can even chain platforms together, investing the returns from one platform to gain additional returns from another. This can be incredibly rewarding, but there’s much more risk involved too.
DeFi tokens are arguably the most volatile assets in the blockchain industry, with multi-digit gains and total depreciation being equally common events. Due to this, more stable DeFi platforms like Centric, which offers periodic appreciation through a dual-token system, are also gaining traction.
Decentralized finance is so influential that it’s even brought BTC to the Ethereum blockchain with Wrapped Bitcoin (WBTC), bringing the original cryptocurrency’s liquidity to the financial services in DeFi. Decentralized finance is complex, but that’s not always a negative.
The financial system around us today is complicated, but with time their standardization means most of the technology behind banking is unseen to the end-user. Further, decentralized finance brings features that can’t be implemented on traditional systems. While blockchain allows traders to swap tokens, the concept of swapping a stock on one exchange for stocks on another is inconceivable.
Banks, institutional investors, and national regulators worldwide are finally paying attention to blockchain, and it’s primarily due to the splash DeFi has created. No middlemen mean lower overhead costs and higher profits for everyone involved. Cryptocurrencies have been at the receiving end of both hype and criticism, with some dubbing it the future of money and others calling it an excessively inflated bubble.
DeFi has shown the world that cryptocurrencies and blockchain technology are here to stay. Years of development have gone into attracting mainstream adoption, and with how well DeFi performed over the last year, people are finally paying attention.