Decentralized finance, or DeFi for short, is a new wave of financial applications built on Ethereum that are designed to offer users a more decentralized and open alternative to traditional financial products and services.
DeFi apps range from protocols that enable the lending and borrowing of digital assets, to platforms that facilitate the creation and trade of synthetic assets, to data and analytics tools for tracking and understanding the burgeoning DeFi ecosystem.
While still in its early days, the DeFi space has seen explosive growth in recent months, with the total value locked in Ethereum-based DeFi protocols surpassing $1 billion in mid-2019
This rapid growth has been driven by a combination of factors, including the launch of popular protocols such as Maker and Compound, as well as the growing interest in Ethereum from both retail and institutional investors.
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To make it easy: while Bitcoin was created to decentralize money, DeFi intends to decentralize financial services, taking out all sorts of intermediaries, whether banks or brokerages themselves.
The term emerged a few years ago – there is no exact date for its emergence – and since then, the number of projects in this system, in addition to the amount of money and users, has grown day by day, gaining more strength since 2019.
Generally speaking, it is basically a new technology that involves building and offering financial products and services in a decentralized way, from a blockchain, as an alternative to the traditional financial market.
With DeFi protocols now handling billions of dollars worth of value, there is a growing need for solutions that can provide users with greater security, transparency, and trustlessness. In particular, many DeFi protocols currently rely on centralized exchanges, which introduces counterparty risk and raises concerns about the centralized control of user funds.
There are a number of projects working on solutions to these problems, including decentralized exchanges (DEXes) that can provide users with a more secure and trustless way to trade digital assets, as well as platforms that offer greater transparency around protocol governance and risk management.
Most DeFi applications use Ethereum blockchain to complete transactions, as it allows the creation of smart contracts (Smart Contract) which are like pre-programmed protocols in blockchains that, once it reaches such contract conditions, it runs itself, automatically, without the need for any intermediating body.
Currently, Ethereum is the second most traded cryptocurrency in the world, second only to Bitcoin. In general, its blockchain makes it possible to run a series of applications through decentralized brokers (DEX) or dapps, where markets are always open and there are no authorities that can block payments or deny access to anything.
Using dapps like Uniswap, Compound and Maker, you can do just about anything with cryptocurrency that you can do with traditional currencies like the dollar.
Some features include, for example, borrowing and lending coins anonymously, making investments, having access to stable coins and volatile ones like Bitcoin itself.
To give you an idea, there are applications that charge rates less than 1% per year and lend 100% of the value of the crypto given as guarantee to any client that activates the mechanism, not to mention the possibility that some protocols offer to monetize the cryptos that are “stopped” through Stake, Pool and Farm, which are not even compared to the derisory ones of traditional banks!
According to the DeFi Pulse website, Decentralized Finance currently has about $48 billion locked in (TVL) in its protocols, having peaked in May 2021, with about $87 billion.