Decentralized Finance, or DeFi, has been boasted as the new standard by many investors and financial advisors. As a result, it is believed that traditional finance (TradFi) may become obsolete. These ideas, however, are mostly just speculation.
The reason why so many people are getting into DeFi is because it breaks the barriers of traditional finance and allows people to have new freedoms with their money. With the market cap of DeFi skyrocketing to $199 billion in 2021, it is clear that more and more people are discovering a use case for DeFi. This growth only drives more people on board.
How DeFi Works
DeFi uses blockchain technology to provide financial services without a middleman or centralized institution. It uses smart contracts to perform automated tasks without requiring human intervention. DeFi consists of cryptocurrencies and stablecoins, allowing users to make financial transactions, invest and even take loans.
What is DeFi Used For?
DeFi was invented to serve most of the same purposes we use traditional finance but with the benefits of being decentralized.
The use cases of DeFi are:
Lending/borrowing: Lending cryptocurrency is a form of investment as you are able to earn interest and rewards. Alternatively, cryptocurrency can be borrowed, which is helpful for traders.
Trading: Decentralized exchanges (DEXes) allow people to trade cryptocurrencies without depending on middlemen to take custody of their assets in each trade. Through DEXes, people are able to trade directly with each other.
Global transactions: Sending money overseas is often a tedious process that is long and expensive. It can take over a week to receive funds from an international transfer. When using DeFi, you can send cryptocurrency anywhere in the world and the receiver will get it within minutes. It is also a lot cheaper to use DeFi as transactions only cost a few cents.
Inflation hedge: Some countries have volatile currencies that lose their value drastically due to inflation. For example, in 2022, Turkey’s inflation rose to 85%. Citizens of the countries use DeFi to secure their wealth against inflation.
How long has DeFi existed?
DeFi has existed for 14 years.
The first appearance of DeFi was in 2008 when the cryptocurrency Bitcoin was released. It wasn’t until 10 years later, in 2018, when the term ‘DeFi’ was coined.
Since then, DeFi innovations have been increasing rapidly and new tools are introduced every day.
What’s controversial about DeFi?
Despite the amazing use cases of DeFi, there are a lot of things that make DeFi controversial.
The main challenges of DeFi are:
Scams: The crypto space is saturated with scammers who see the rise in DeFi usage as an opportunity to trick people. Since crypto became popular in 2020, crypto scams have increased by 81%. Crypto scams consist of phishing links and rug pulls (when project founders abandon a project and take all the profits).
Hackers: In just two years, there have been 316 security breaches with over $4 billion in crypto stolen from users. Because DeFi technology is still new it has underdeveloped security. This make DeFi vulnerable to hackers.
Volatility: Crypto crashes: The volatile nature of cryptocurrencies means that the chances of crypto prices falling to zero is high. This often happens when a cryptocurrency is overhyped, despite not having a use case. Sometimes even legitimate cryptocurrencies can crash in price. In May 2022, UST stablecoin fell below $1 due to failures of its algorithm.
Regulation: Because crypto is not regulated, the market is prone to manipulation and instability. The lack of regulation also makes it easier for money laundering and fraud to occur.
What is the market cap of DeFi?
The market cap of DeFi is $40 billion. This is much lower than its highest point at $199 billion in 2021. The market cap of DeFi is likely to rise again over the next few years as more people learn to use DeFi.
Which DeFi platforms to use/Dex
The most important thing to consider when choosing a DeFi platform is how reputable a platform is. To know if a platform is reputable research user reviews, how they handle customer support and research their history in the market.
Here is a list of well-know DeFi platforms:
- Uniswap
- Maker
- AAVE
- Balancer
- Curve Finance
- Compound
- Yearn.finance
- Sushiswap
- WBTC
- Pancakeswap
Platforms like Coinbase and Binance are not DeFi platforms. They are centralized financial crypto exchanges, also known as CeFi or CEXes.
FAQs about DeFi
What’s the difference between DeFi and crypto?
DeFi refers to the decentralized applications being built on a blockchain network that make is easier for people to transact and trade cryptocurrency. Crypto refers to any form of digital currency built on a blockchain network. DeFi can be used to transact with crypto.
Can DeFi be hacked?
Contrary to popular belief, DeFi can be hacked. Although DeFi is built using complicated systems, it is still vulnerable to security breaches and requires you to act with diligence.
Top 3 DeFi Platforms
The most used DeFi platforms differ across different blockchain networks. Here is a list of the most used DeFi platforms:
Uniswap (UNI)
Uniswap (UNI) is by far the biggest DeFi platform in terms of transaction volume. Built on the Ethereum network, the Decentralize Exchange (DEX) is known for being highly effective. Uniswap is trusted and favoured by many. This is due to the high activity of developers to constantly improve the platform. It is has a trading volume of $1 trillion. Uniswap is the second most used DeFi platform.
Pancakeswap (CAKE)
Pancakeswap (CAKE) is another popular DeFi platform. It is a part of the Binance BSC ecosystem. It is the most visited DeFi platform with over 13 million daily visitors. Pancakeswap is preferred by some because of its low trading fees and quick transaction times. It has a trading volume of $279 million.
Trader Joe (JOE)
Trader Joe is a DeFi platform built on the Avalanche (AVAX) network. The DEX was founded in 2021 by anonymous developers. Trader Joe is a favourite of many users of the Avalanche network. It has a trading volume of $1.1 billion.
What is the Future of DeFi?
The constant increase in users and platforms, indicates that the future of DeFi will consist of mainstream usage globally.
DeFi user increase plummeted by over 50% in 2022. The main reasons for this are likely due to market volatility and crypto hacks. If DeFi is able to solve these issues, we can expect to see exponential growth again.
Will Traditional Finance become obsolete?
Traditional finance will not become obsolete any time soon. Despite many people transitioning to DeFi, the majority of people around the world are still unable to as DeFi requires access to advanced technology.
DeFi technology still has a long way to go in order for it to be a suitable system for many businesses and people.
