All you need to know about Decentralized Finance (DeFi)

By
Blaise from Nyctale

A growing disruption in the financial industry

Within the FinTech area, blockchain networks are supporting the rise of decentralized financial services. These innovative tools aim at transforming the financial system in a more decentralized, innovative, interoperable, border-less, and transparent way.

So-called Decentralized Finance (DeFi) applications are providing alternative means to deliver digital financial services. It represents one of the main application types for cryptocurrencies, as it enables investors, holders, lenders, or savers to hold, trade, and transact digital assets. This specific segment offers similar features than traditional financial systems by connecting borrowers and lenders for instance, but it fundamentally differs in the decision-making process, technology, governance, and transparency. DeFi enables users to invest, save, and transact on blockchain managed systems in a peer-to-peer way.

DeFi is currently a prime mover to cryptocurrencies adoption. It has become an exciting and highly valued movement in the blockchain space with a growing traction over the last two years. In February, the Total Value Locked (TVL) in DeFi projects passed $1 billion for the first time. The value pulled back the following month, but it is now again above that milestone. While $1B is a relatively modest amount by conventional financial sector standards, decentralized technologies clearly have the potential to power innovative and diverse products and services.

Emerging success stories within the cryptoasset space

DeFi is fueling a wave of experimentation and innovation in the FinTech space, including offerings of decentralized versions of mainstream financial products. This includes simple services but also more complex products:

– Dollar-pegged stablecoins (e.g, MakerDAO)

– Decentralized exchange platforms (e.g., Kyber network or 0x)

– Peer-to-peer lending protocols (e.g., Compound or Aave)

– Synthetic assets (e.g., Synthetix or UMA)

– Decentralized leverage trading (e.g., dYdX)

– Insurance (e.g, Nexus Mutual)

– Predictions Market (e.g., Augur)

– Interest on crypto (e.g., Celsius Network)

While prominent cryptoassets have performed well this year, with Bitcoin up more than 30% and Ethereum more than 80% as of June, DeFi tokens in the top 100 have an averaged year-to-date (YTD) return superior to 200%. This increase is notably led by Kyber Network and Aave which soared by more than 500% and 400%, respectively.

Source: Messari.io

A renewed financial infrastructure stack

DeFi represents an entirely new financial infrastructure stack with financial primitives, automatic market-makers, priceless synthetic assets, reflexive bonds, etc. This provides an easy access for an exponentially growing number of users to products that would otherwise remain out of reach.

In the end, DeFi unique competitive advantages lies in its combinatorial innovation capacity to enable the development of new products and services in organic and unexpected ways. These new financial technologies can become the building blocks for future innovations, promoting new combinations and new products. If successful, these decentralized business models have the potential to reshape the FinTech industry and create a new landscape for entrepreneurship and innovation.

Sources

– Blockchain disruption and decentralized finance: The rise of decentralized business models [1]

– What is Decentralized Finance (DeFi)? [2]

– DeFi Is Reinventing Global Finance Faster Than The Fed Can Print Money [3]

– Decentralized Finance (DeFi) Trends [4]

– DeFi Tokens Lead Crypto Returns in 2020 [5]