Decentralized Finance, or DeFi, is a movement that enables individuals to access financial services such as borrowing, lending, and trading without relying on centralized institutions. These financial services are delivered using Decentralized Applications (Dapps), the vast majority of which are built on the Ethereum platform.
DeFi is not a single product or firm, but rather a collection of goods and services that serve as a replacement for institutions such as banking, insurance, bonds, and money markets. DeFi Dapps allow customers to integrate their services, opening up new possibilities. Because of its modularity, it is frequently referred to as money LEGOs.
DeFi Dapps typically require collateral to be locked into smart contracts in order to function. The total value locked in DeFi Dapps is commonly referred to as the cumulative collateral locked. According to DeFi Pulse, the Total Value Locked was about $275 million at the start of 2019, but it hit a peak of $1.2 billion in February 2020. The quick rise of Total Value Locked is a sign of the DeFi ecosystem’s rapid expansion.
The DeFi Ecosystem
With such quick development, we couldn’t possibly cover everything DeFi has to offer in one book. That is why we have chosen a few categories and DeFi Dapps that we feel are essential for novices to grasp before entering the DeFi ecosystem. These DeFi Dapps have the potential to disrupt traditional financial services by eliminating the need for any middlemen. It should be emphasized, however, that DeFi in its current condition is still very embryonic and experimental, with many projects being significantly developed on a daily basis. DeFi may evolve more and become unrecognizable from what it is today as time goes on. Nonetheless, understanding the early days of DeFi is helpful, and with the appropriate knowledge, one may still take use of the functionality given by DeFi Dapps today.
How Decentralized is DeFi?
It’s difficult to say how decentralized DeFi is. For the purpose of convenience, we shall divide the degrees of decentralization into three categories: centralized, semi-decentralized, and totally decentralized.
- Centralized
Characteristics: Custodial, uses centralized price feeds,
centrally — determined interest rates, centrally — provided liquidity
for margin calls
Examples: Salt, BlockFi, Nexo and Celsius
2. Semi-Decentralized (has one or more of these characteristics but not
all)
Characteristics: Non-custodial, decentralized price feeds,
permissionless initiation of margin calls, permissionless margin
liquidity, decentralized interest rate determination,
decentralized platform development/updates
Examples: Compound, MakerDAO, dYdX, bZx
3. Completely Decentralized
Characteristics: Every component is decentralized
Examples: No DeFi protocol is completely decentralized yet.
