June 7, 2019 - min

All You Need To Know About

Decentralized Finance (DeFi)
Despite the fact that cryptocurrency prices continue to struggle, there is new
hope in the industry. That’s because of Decentralized Finance, a blockchain-
based concept that threatens to overrun traditional nancial institutions in the
long run. Despite its enormous potential, DeFi is still in its nascent stages. DeFi
systems can be fairly unforgiving towards the uninitiated. So, it’s best to have a
thorough understanding of how it works before getting involved.

In this article you’ll nd out:

1. What Is Decentralized Finance (DeFi) and how has it changed over time?
2. The advantages Of Decentralized Finance.
3. Problems With Decentralized Finance.
4. The best Decentralized Finance Options & Apps.

What Is Decentralized Finance (DeFi)?

While DeFi has indeed become one of the crypto buzzwords of 2019, many are
wondering whether it will live up to the hype. It’s still in its early days, but DeFi
certainly doesn’t lack ambition.

DeFi is the idea that decentralized blockchain-based architecture can create

traditional nancial instruments. This will keep the instruments outside of
governmental and regulatory control.
In other words, DeFi wants to create a completely decentralized and
independent nancial system that doesn’t rely on the traditional banking system
at all.

A Short History Of Decentralized Finance

DeFi probably comes closest to the original vision of Bitcoin founder Satoshi
Nakamoto. The most articulate expression of Satoshi’s original vision is perhaps
in the rst line of the Bitcoin whitepaper:

Graphic with quote about DeFi

Bitcoin has largely remained true to this vision of decentralization, but once
people noticed the potential of its underlying blockchain technology, the story
became a little different.

Both banks and governments weren’t very keen on Satoshi’s original vision
because their entire nancial infrastructure hinges on the existence of an
intermediary. At the same time, these institutions could not afford to ignore the
potential of blockchain technology itself.

As a result, banks, nancial institutions, governments, and even tech giants like
IBM and Microsoft began approaching blockchain from a different perspective.

Today, multiple industries are exploring blockchain technology, including (but

not limited to) supply chains, healthcare, insurance, retail, and advertising.
However, a lot of this development has happened over private distributed
ledgers vis-a-vis public ledgers like those used by Bitcoin and Ethereum.

This takes away from Satoshi’s original vision of complete decentralization. This
is where DeFi comes into the picture.

The DeFi movement started towards the end of 2018 when a network of 15
Ethereum-based projects came together in an attempt to build an independent
and open nancial system. This included projects like MakerDAO, Origin
Protocol, and Paradigm, followed by others like Compound and the Kyber
Network.
The network also laid down some guidelines for DeFi members. Firstly, the
project has to either be building on or building a service for a decentralized
blockchain within the nance sector.

It also has to align with the core principles of DeFi (accessibility, transparency,
nancial inclusion, etc), adhere to common standards, and push for
interoperability.

As of today, a wide variety of projects form part of this network, including

exchanges, wallets, prediction markets, liquidity protocols, and stable coins.

The Advantages Of Decentralized Finance

DeFi de nitely has some major advantages, both in theory and in execution, that
make it such an exciting phenomenon:

As an idea, DeFi is immensely powerful. It’s especially attractive to people

with a contrarian, libertarian streak in them. The idea of building
censorship-resistant products that are completely independent of existing
structures is very exciting.
DeFi applications have a multi-facet, long-term potential. Fallible people
run existing nancial structures, which are thus highly susceptible to
vulnerabilities. In Venezuela, for instance, poor policies combined with
crashing oil prices have crippled the economy. DeFi applications can build
alternate nancial systems that are more transparent and less susceptible
to human failings. In fact, in Venezuela itself, some people are using
Bitcoin to protect themselves from in ation and send money across
borders. However, it should also be noted that “decentralized”  exchanges,
cryptocurrencies, blockchains, etc. They also have their fair share of scams,
hacks, theft, and other vulnerabilities.
DeFi does for nance what Bitcoin does for currency; it eliminates the
need for an intermediary. Cutting out the middleman while providing
nancial infrastructure and services on a large scale that can yield major
ef ciencies and cost savings in the long run.

The Best Decentralized Finance Apps

Here are some of the best known DeFi apps out there in the market today.

Gif with DeFi apps

DAI
DAI is MakerDAO’s stablecoin. MakerDAO enables users to receive loans of DAI
if they deposit suf cient Etherum. DAI is the largest DeFi application and close
to 21,000 people currently hold DAI. The technology behind DAI is complex and
lays out rules for maintaining the system and minting new DAI.

Dharma

Dharma is another decentralized lending application that lets users lend and
borrow Etherum even if they don’t have a credit score or a bank account. It
currently has about $10 million in locked Ether.

Bancor Network

The Bancor Network is a decentralized exchange and liquidity provider. It lets

users trade cryptocurrencies directly with each other without any intermediary.

Problems With Decentralized Finance

While there’s no doubt that DeFi is one of the most promising phenomena in the
crypto scene right now, it’s still in its early-stage. And that comes with its own
share of challenges:

One of the biggest risks of DeFi applications is that you’re ultimately

trusting in open-source code. Over time, many people are looking at that
code and there’s always a chance that someone could hack the smart
contracts and steal all the keys. That’s why popular DeFi applications like
Dai have been audited by well-known security rms like Trail of Bits.
People also feel that DeFi is probably too idealistic. In other words, the
road to utopia lies in a series of small steps like say a stablecoin created by
a giant like Facebook that already has billions of users. Many people prefer
the scale that such a solution promises versus the idealism of a DeFi
application.
The DeFi sector is still extremely underdeveloped. According to
DeFi.Review, MakerDAO, the biggest DeFi platform has $346 million
locked up. This is followed by EOSREX, a DeFi platform for EOS lending,
which has $296 million in assets. However, the third largest service,
Compound, has only $32 million in assets which goes to show that the
sector is still very nascent. This means users need to be especially cautious
while using DeFi platforms.
The technology is still user-unfriendly and prone to vulnerabilities. It will be
some time before the security protocols are in place and the technology is
actually safe to use.
Conclusion

There are two things that can be said about DeFi. The rst is that it’s
breathtaking in scope and potential. The second is that its future is promising
and could show strong growth over the next few years.

Having said that, it’s also true that the technology has a long way to go and it
will be many years before it sees any real traction or market share (if any).

It also poses certain risks to investors and users. Also, there are several
challenges around scalability, security, regulations, and liquidity that DeFi will
have to solve before it can realize its full potential as an alternative nancial
system.

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