Decentralized finance (DeFi) is quickly becoming one of the biggest things in the blockchain industry. So what is it?
In simple terms, DeFi describes the intersection between traditional finance and blockchain. Think of DeFi as your traditional banking services without the banks. Users of DeFi systems are accountable to a set of predetermined rules, rather than a centralized decision-making authority. With the blockchain providing publicly viewable contracts, savers and borrowers can observe their interest rates and depositors can track the loan to value ratio (LTV) in real-time.
While the sector still has a long way to go before it reaches the scale of legacy financial systems, there are a number of projects that enable lending, earning and borrowing through the blockchain. In fact as of today, there is over $610M locked in DeFi smart contracts on Ethereum alone – and this number is growing fast. Looking at the DeFi industry as a whole, there is over $1.1Bn of collateral committed.
USD Value of Ethereum locked in DeFi contracts
So what can you do with Decentralized Finance?
As finance aims to facilitate economic interactions in the real world, decentralized finance lubricates the wheels of the blockchain ecosystem. There are currently three main sectors that DeFi is serving;
While DeFi offers a range of benefits to the users, it is clearly not without its risks. Although the contracts that power DeFi are viewable through a public tool like Etherscan, there are still very real threats to those who choose to use it. A developer could – knowingly or unknowingly – update parts of the code without the community being immediately aware. In place of traditional regulators, we now have a nascent industry of smart contract auditors as well as best practice documentation and frameworks for smart contract development – which we need to rely on.
Decentralized Finance has a long way to go. But the rate of innovation and growth in capital allocated to the DeFi space speaks volumes about its future.