Decentralized finance—often called “DeFi”—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols that are crowding traditional financial services. Now with over $13 billion worth of value locked in Ethereum smart contracts, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.
Decentralized finance—often called DeFi—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Now with over $13 billion worth of value locked in Ethereum smart contracts, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.
Decentralized finance—often called DeFi—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Now with over $13 billion worth of value locked in Ethereum smart contracts, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.
A DAO is a decentralized autonomous organization. It is an entity that lives on the Internet and exists autonomously, but also cooperatively. While DAOs are often compared to corporations, they are very different beast altogether. A DAO's rules are encoded into smart contracts, eliminating the need for a central authority or management structure. Instead, DAOs are governed by policies that all members agree to. These policies are enforced by the code of the smart contracts, meaning that they can be enforced automatically and without bias.
The most well-known DAO is TheDAO, which was created in 2016 and was intended to be a Decentralized Autonomous Organization that would invest in Ethereum projects and earn a return for its investors. However, due to a flaw in its code, TheDAO was hacked and over $50 million worth of Ethereum was stolen. TheDAO incident led to a fork in the Ethereum blockchain, with the original Ethereum blockchain (now Ethereum Classic) continuing on without TheDAO's funds, and the new Ethereum blockchain (now simply Ethereum) returning TheDAO's funds to its investors.
Despite the setback of TheDAO hack, interest in DAOs has continued to grow. In 2017, several new DAOs were launched on the Ethereum network including Aragon, MolochDAO, MetaCartel Ventures, and MakerDao. In 2019 alone, over $100 million has been raised by DAOs through initial coin offerings (ICOs).
A decentralized exchange (DEX) is a cryptocurrency exchange which operates in a decentralized way, without a central authority. Decentralized exchanges allow peer-to-peer trading of cryptocurrencies. This means that users can trade directly with each other, without the need for an intermediary. DEXes are powered by smart contracts on a blockchain network.
Some of the benefits of decentralized exchanges include improved security ( because they are not centrally hosted ), increased transparency ( all trades are recorded on a public ledger ), and improved censorship resistance ( as they cannot be shut down by governments or other centralized authorities ).
However, decentralized exchanges also have some drawbacks. They can be more complicated to use than centralized exchanges, and may have reduced liquidity.
Decentralized finance protocols—often called “DeFi protocols”—are a set of Ethereum-based smart contracts that aim to provide financial services that are typically offered by centralized institutions, such as banks, exchanges, and lending platforms. By deploying these protocols on the Ethereum blockchain, they can offer these services in a decentralized manner, without the need for a central authority.
One popular type of DeFi protocol is a decentralized lending protocol. These protocols allow users to borrow and lend cryptocurrency in a peer-to-peer manner, without the need for a centralized lending platform. Instead, they use smart contracts to facilitate the loan agreement between two parties.
populr type of DeFi protocol is a decentralized exchage protocol. Theseprotocols allw users to swap one cryptocurrency for another in a peer-to-peer manner, without the need for an centralized exchange platform. Insted, they use smart contracts to facilitate the trade agreement between two parties.
Decentralized finance—often called DeFi—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. But how does it work? In this beginner’s guide to DeFi, we’ll explore the infrastructure of the Ethereum blockchain as well as the key applications driving the growth of the decentralized finance movement.
Decentralized finance—often called DeFi—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Now with over $13 billion worth of value locked in Ethereum smart contracts, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.
Decentralized exchanges (DEXes) are cryptocurrency exchanges that do not rely on third parties to hold customers’ funds. Instead, trades occur directly between users (peer-to-peer) through an automated process. Decentralized exchanges are often created as decentralized applications (dApps) on a blockchain platform.
How do DEXes Work?
A DEX typically has two main components: a decentralized trading engine and a decentralized custody solution. The trading engine is responsible for matching buy and sell orders and executing trades. The custody solution is responsible for storing users’ funds securely in wallets that they control.
Most DEXes use smart contracts to facilitate trades. A smart contract is a piece of code that is stored on the blockchain and executes automatically when certain conditions are met. For example, a smart contract could be used to hold funds in escrow until both parties have confirm they have received the goods or services they agreed to trade.
DEXes also typically use order books to match buyers and sellers. An order book is a list of all the buy and sell orders that have been placed for a particular asset, organized by price. When a user places an order on a DEX, it is added to the order book. The trading engine then uses the order book to match orders and execute trades.
Decentralized lending protocols are lending platforms that run on decentralized infrastructure such as the Ethereum blockchain. These protocols provide crypto-collateralized loans to users who wish to borrow against their crypto assets without having to go through a centralized exchange.
The way these protocols work is that users first need to deposit their crypto assets into a smart contract as collateral. They can then borrow against this collateral and receive the loan in the form of a new crypto asset. The new asset can be used to purchase other assets or used in other ways. The borrower will then need to repay the loan plus interest at a later date.
There are many different decentralized lending protocols that have been developed over the past few years. Some of the more popular ones include MakerDAO, Compound, Dharma, and others. Each platform has its own unique features and terms for loans.
If you are thinking about borrowing against your crypto assets, then you should research the different decentralized lending protocols to see which one best suits your needs.
Decentralized finance (DeFi) is a growing ecosystem of financial protocols built on Ethereum. DeFi protocols provide an open, composable platform that enables anyone to build and use decentralized applications (DAPPs) to do everything from lending and borrowing to earning interest on your crypto holdings. By using smart contracts, DeFi protocols remove the need for traditional financial intermediaries, like banks or asset managers, and instead let users directly interact with one another. This not only makes DeFi applications more accessible and easier to use than traditional financial products, but also opens up a world of new possibilities for what you can do with your money.
While still in its early stages, the DeFi ecosystem has already grown to include a wide range of protocols and DAPPs with over $13 billion worth of value locked in Ethereum smart contracts. And with new protocols and DAPPs being built every day, the possibilities for what you can do with DeFi are only limited by your imagination.
So, whether you’re looking to trade crypto without having to go through a centralized exchange, earn interest on your digital assets without having to put them into a savings account, or take out a loan against your ETH holdings without having to go through a traditional lender, there’s a DeFi protocol out there that can help you do it.