Cryptocurrencies have grown into a trillion-dollar industry, causing a massive wave of financial disruption around the world. The crypto revolution began with Bitcoin – the original cryptocurrency – which has become a payment system that allows anyone on the planet to enjoy uninterrupted money remittance to anyone across the globe.
Decentralised finance (DeFi) which is an extension of crypto remittance seeks to take crypto’s accessibility a step further. DeFi moves beyond just currency and creates sophisticated systems and applications with an abundance of use cases addressing borrowing, lending, trading etc.
So why is the world fussing about DeFi? In this piece, we dive into what DeFi is, how it works its magic, its outlook for the year and the top five most active DeFi platforms of 2021.
What is DeFi, and how does it work?
Decentralised finance, also called DeFi, is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, you can easily do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and so much more — but it’s faster, efficient and doesn’t require paperwork or third-party interference.
DeFi is global, peer-to-peer, pseudonymous, and open to all. DeFi typically uses smart contracts which are automated enforceable agreements that do not need intermediaries to execute and can be accessed by anyone with an internet connection.
Furthermore, for DeFi to work, it needs a decentralised infrastructure to run on. This is where the Ethereum blockchain comes in. The Ethereum blockchain is a DIY platform for decentralised applications (dApps). DeFi uses cryptocurrencies and smart contracts on the Ethereum blockchain and other competing blockchains to provide services.
DeFi Outlook 2021
As of November 2020, less than $20 billion worth of value was locked in various DeFi products, most of them on Ethereum. By the following year, it was worth $250.55 billion, suggesting a growth rate of more than 1,000% in just a single year.
The summer of 2020 became the starting point for the development and growth of the modern DeFi market as the pandemic soared across the globe, and the traditional financial system buckled under pressure. DeFi applications like borrowing, lending, insurance, and other services that are usually only offered by traditional finance were developed during lockdown.
The US is leading global adoption in decentralised finance with Vietnam, Thailand, China, and the UK close behind as cryptocurrencies gain momentum, according to a new study by crypto analytics firm, Chainalysis.
However, the DeFi ecosystem is still fraught with infrastructural mishaps and hacks. Scams are also rampant in the fast-evolving DeFi infrastructure. A report by London-based firm Elliptic, posited that more than $10 billion worth of user funds had been stolen in cases of fraud and theft on DeFi products in 2021.
News like that has drawn the attention of government regulators with some of them calling for stricter legislation. In August 2021, the US Securities and Exchange Commission called for tougher regulation of DeFi, and suggested that some DeFi platforms could fall foul of securities laws.
Top 5 DeFi Platform/project 2021
MakerDAO is one of the oldest DeFi projects, and the biggest, with $19.3 billion in total value locked — which gives it about 18% of the dollars invested in DeFi projects at present.
Aave is a decentralised finance platform where users can lend and borrow a wide range of cryptocurrencies. People seek to lend crypto to earn interest or borrow capital in exchange for paying interest.
Fantom is an open-source smart contracts platform for dApps and digital assets. This platform simplifies the borrowing, lending, and trading of synthetic assets. All you have to do is access your digital wallet, deposit tokens, and you can start earning.
PancakeSwap is unique in that it runs on the Binance Smart Chain rather than Ethereum. This means that trades are cheaper and faster. It has grown very quickly as the use of BSC has soared.
Compound is a liquidity source for borrowing and lending assets. When you make a deposit to Compound, you receive CTokens in return, which you can then use to purchase other cryptocurrencies on the platform.
In conclusion, DeFi offers numerous advantages, such as removing intermediaries and brokers. It is also seen as a better finance tool in countries with underdeveloped financial systems.
Although still poorly regulated and still in its early stages of development, DeFi has the potential of contending with the global economy as a parallel system of payments and accumulation of wealth.
Ultimately, the DeFi market is still a vast ocean swimming with money, where both opportunities and dangers abound, but the need for it is irrefutable.