Decentralised Finance: Explaining the DeFi movement

It may sound like an acronym that seems more at home within the world of music, but DeFi is actually gaining some considerable momentum within the world of blockchain and cryptocurrencies.

DeFi stands for ‘decentralised finance’ and is broadly used as an umbrella term for the wider ecosystem of financial applications that are being driven by blockchain technology.

Fundamentally, DeFi could be defined as a movement that champions the application of decentralised networks along with open-source software as a means of creating various different forms of financial services and products. The idea behind this is based on developing and maintaining financial apps that operate with the help of a decentralised framework – promoting transparency and, thus, trustworthiness. This is all done through the implementation of permissionless blockchains and other peer-to-peer protocols.

DeFi may be defined as the movement that promotes the use of decentralized networks and open-source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.

DeFi in a nutshell

Binance Academy currently recognises Decentralised Finance as having three key functions:

  • The creation of monetary banking services (such as the issuance of stablecoins)
  • Leveraging peer-to-peer or pooled lending and borrowing platforms
  • Utilising technologically advanced financial instruments like DEX, token platforms, derivatives and predictions markets

Naturally, these fields can broadly refer to many types of DeFi services. There are plenty more examples of advanced products and services supported by DeFi, including funding protocols, software development tools, index construction, subscription payment protocols and data analysis software. Other applications can be used for services like Know-Your-Client screenings (KYC), Anti-Money-Laundering protection (AML), and various other identity management systems.

DeFi brings many benefits to the table when compared with more traditional applications of financial services. Smart Contracts are an excellent way of brokering agreements between two parties without the need for mediation, while distributed systems can make the processes associated with financial applications much easier and significantly more secure. Many Decentralised Finance apps are being built on Ethereum’s blockchain network – which has worked as a significant factor in reducing operational costs and lowering entry barriers for users.

So, in a nutshell, the DeFi movement effectively shifts the traditional financial products that we’re used to seeing in everyday life into an open-source ecosystem that champions the freedom that’s leveraged by decentralisation. With Decentralised Finance, intermediaries are a thing of the past – thus helping to lower operational costs without compromising any security.

The rise of MakerDAO (DAI)

DeFi is already a pretty seismic movement, as evidenced by the $700m worth of market value locked within its various applications.

hundreds of millions in USD are locked in smart contract decentralized finance platforms enabling decentralized lending based on blockchain technology. currently 669 million USD are locked in blockchain smart contracts.

The total market value of DeFi has been calculated by DeFi Pulse, a leading index that focuses on Decentralised Finance. The website works out a quantifiable value by monitoring each protocol’s underlying smart contracts within the Ethereum Blockchain. Each hour this metric gets refreshed and charted by pulling the total balance of Ether (ETH) and ERC-20 tokens that are held by said smart contracts. The total value is then calculated by taking these balances and multiplying by their price in US Dollars.

Accounting for nearly half of DeFi’s total market value locked stands Maker – a pioneering and ambitious cryptocurrency lending organisation that has found plenty of success within its DAI stablecoin digital currency.

Raphael Birchner
CHAIA Master Brain