In 2020, DeFi began to flourish, and in 2021, DeFi Summer ignited the market. In 2022, the total value locked reached a historic high of $219.47 billion. So, what exactly is decentralized finance?
DeFi, short for Decentralized Finance, is a financial ecosystem built on blockchain networks through smart contracts. The problems that DeFi aims to solve include decentralization, eliminating rent-seeking intermediaries, and improving the current financial system with low barriers and high efficiency.
For example, let's consider cross-border payments in traditional finance. When someone needs to send money to someone in another country, they typically have to approach a financial institution and go through a registration and verification process, which involves third-party intermediaries charging fees. Additionally, it may take several working days to complete the transaction.
In DeFi, however, users only need to send their assets from their wallet accounts directly to the recipient, without the need for third-party intermediaries. Transactions are usually completed within 1 hour and are not constrained by human working hours.
Compared to traditional centralized finance, DeFi offers the following advantages:
Decentralization: DeFi allows for the direct bypass of intermediaries and arbitration institutions. Codes can provide solutions for various potential disputes, and users have full control over their funds through private keys. This approach reduces the cost of using products and contributes to a more harmonious financial ecosystem.
Low Barriers: Anyone has permission to access and enjoy DeFi financial services, without entry barriers based on identity or income. This has the potential to cover groups that are unable to access financial services in the real world.
Open Source and Open Access: All protocols are open source, allowing anyone to build new financial products and services on the protocols. This is one of the main factors driving the rapid development of this field.
Just as there are various decentralized applications, there are also numerous use cases for decentralized finance (DeFi). These include decentralized exchanges, lending, payments, wealth management, insurance, asset financing, and more specialized areas.
Payments: Similar to Bitcoin, all smart contract platforms can send funds worldwide, making it as simple and fast as sending an email.
Decentralized Exchanges (DEX): Users can self-manage their funds through private keys on DEX platforms. No registration or verification is needed, and users can conveniently exchange any tokens they need.
Decentralized Lending: Anyone who can provide collateral can directly complete lending without revealing information to third parties. Borrowers secure loans by collateralizing their crypto assets and paying interest, while lenders earn interest by depositing assets on the platform.
Stablecoins: These are digital tokens pegged to specific assets, with many anchoring to widely accepted currencies like the US Dollar. For many financial products and general consumption, it's challenging to handle the high volatility of cryptocurrencies. The emergence of stablecoins addresses this issue. The growing stablecoin market provides strong support for DeFi.
Decentralized Insurance: Decentralized insurance aims to make insurance cheaper, faster, and more transparent. As automation increases, insurance becomes more affordable.
Uniswap is a decentralized trading protocol built on Ethereum, allowing for quick and convenient exchange transactions between ETH and all ERC20 tokens. It pioneered the use of the Automated Market Maker (AMM) model, helping DEX to successfully enter the mainstream market.
Uniswap is currently the largest DEX in the blockchain industry, supporting 7 public chains including ETH, Polygon, Arbitrum, Optimism, BNB Chain, Avalanche, and Celo. Uniswap also supports NFT trading, aggregating orders from trading markets like OpenSea, X2Y2, SudoSwap, LooksRare NFT, making it a comprehensive decentralized trading platform.
Aave is a decentralized lending system based on Ethereum, allowing users to borrow, lend, and earn interest on various crypto assets without intermediaries.
A liquidity staking platform providing a decentralized staking solution for proof-of-stake (POS) chains. Lido is currently the largest decentralized staking protocol for ETH 2.0, offering liquidity to staked assets.
MakerDAO is the first and the largest decentralized stablecoin project.
DeFi aims to address financial inequality and create a more equitable and open financial system. While it has made significant progress and development during the previous bullish market cycle, it is still in its early stages compared to traditional finance. The user base is relatively small, and there is a higher focus on speculative and arbitrage activities. There is still a distance to go before it can truly help a broader population access financial services.
However, we believe that the trend of decentralization will continue. With more resources and innovation being poured into it, DeFi will play an increasingly important role in the financial sector.