Decentralised Finance: DeFi

First and foremost we must define what DeFi is before delving deeper into the different applications and the future of this world.

Decentralised Finance, two simple words put together that created a storm. DeFi means and intends to provide all the products that traditional finance (banks, funds, etc.) currently offer but in a permissionless and decentralised manner.

Simply imagine, being able to purchase a home, get a loan, sign legal documents, make payments, earn interest from anywhere in the world no matter who you are. This is the utopian vision of finance that may one day become true thanks to DeFi.

Applications

There are a multitude of different applications within the DeFi space just as there are in finance. Here are the most important and prominent ones today.

Borrowing & Lending

One of the most basic applications of DeFi is the ability to borrow funds in a permissionless way where liquidations are taken care of by smart contracts. On the other side of borrowing is lending, where users can put their funds in a smart contract (someone else borrows them) and they get paid interest. The most popular platforms for performing this today are: Maker, Aave and Compound.

Decentralised Exchanges

DEXs are the decentralised brother of centralised exchanges such as Binance, Coinbase, FTX etc. You can listen to a previous podcast we’ve made where this is discussed in detail with even some projections that played out perfectly. There are a few of them today such as Uniswap, Curve and Balancer. The user experience however remains problematic and is far from what users are used to with CEXs. A particular project working on providing the same experience in a decentralised manner is project Serum (SRM) built on Solana (SOL).

Derivatives

Exchanging assets using DEXs is of course important and mimics spot markets, but we all know derivatives gain orders of magnitude more attention which is why offering derivatives such as future and options are important to complete the entire UX of DeFi. A few projects working on such products are Synthetix and Opyn.

Assets

Commonly known as wrapping and unwrapping assets, these protocols allow users to use any asset and interact with different blockchains and different protocols. The most popular projects doing this are Yearn, RenVM and mStable.

Main Chain

All of these application need to be built somewhere, on top of something that powers them. For most DeFi applications today, the answer is Ethereum. This is partly one of the greatest value propositions that ETH offers.

As you have probably seen, Ethereum network fees have been sky-rocketing because of the stress that DeFi has put on that chain. Given that the ETH2.0 upgrade is yet to be implemented, scalability remains an issue and keeps this game for the whales because many retail traders simply cannot afford to pay $20-$30 or $40 each time they need to call a smart contract.

In a perfect world, Ethereum’s upgrade gets implemented quickly which keeps it competitive and even better EIP1559 gets implemented which burns a number of ETHs at each transaction as well as introduced a fee cap. This will decrease the ETH supply while demand is on the rise and make Ethereum more affordable to use.

Whether the above scenario plays out swiftly or not is only known by the future. Therefore, we have to take into consideration some of the market share of DeFi going onto another chain for those inefficiency reasons. A contender needs a multitude of things, one of which is of course a working product and the ability to scale. But most importantly, and an often overlooked topic is marketing. Most of the current smart contracts platforms have PR issues and a certain lack of trust, these include EOS, Tron and Cardano. One chain in particular that is becoming increasingly popular is none other than Polkadot. It’s founder is Ethereum’s co-founder Gavin Wood, it has received public support from multiple reputable funds and projects and thus far seems like one of the top choices for some DeFi applications to shift there over the coming years.

The Risks

As with every new sector and novel products, a ton of risk is involved in interacting with smart contracts which is why it always better to interact with audited ones and gain experience first. The user experience remains somewhat difficult to deal with for the everyday person and loss of funds is not unheard of.

Disclaimer: None of the opinions expressed should be construed as financial advice or a recommendation to buy anything under any circumstance.