This research was sponsored by Amun.com
Cryptocurrency and DeFi have been all over the news in the past few weeks, albeit for all the wrong reasons. However, despite a lot of recent negative media coverage, this has resulted in a lot more people wanting to know: “What is DeFi?”
More on that in a moment. First let’s briefly rehash what the news has been about.
Terra Luna
A blockchain called Terra, which has a native cryptocurrency token called Luna, also has a token called UST which was an algorithmic stablecoin, meaning that it was supposed to be pegged to the US dollar.
Unlike UST, other stable coins exist like USDC and USDT that maintain their peg to the dollar by being backed by assets, like dollars or bonds, in an actual bank account controlled by the project. UST was referred to as an algorithmic stable coin because an algorithm was supposed to keep its peg to the dollar by the creation of more Luna tokens to back it. When UST lost its peg to the dollar, the leaders of the Terra project attempted to simply create more Luna tokens.
However, this went out of control; the total supply of Luna tokens went from 340 million to 6.5 trillion in days. The total market cap of Luna tokens went from $40 billion in April to under $1 billion.
Industry expert Nic Carter called it “reckless financial engineering” at Permissionless, a DeFi conference held in West Palm Beach, Florida. It simply is not prudent to back a stable asset with a volatile asset.
Any Publicity is Good Publicity
While the above was an example of how to do it wrong, many projects are doing it right, with innovations in DeFi.
People across the United States have been googling at a record pace.
This is the daily search interest in cryptocurrency every day in 2022, peaking on May 12 with a score of 100.
Similarly, Ethereum as a google search team in the US also peaked at 100 on May 22.
Ok, so now it’s time to answer the question.
What is DeFi?
DeFi is short for decentralized finance.
DeFi refers to the innovations of blockchain applied to the field of finance. DeFi consists of protocols that operate on smart contracts, with the rules laid out in advance in computer code. This removes the reliance on centralized intermediaries like brokerages, exchanges, or banks to offer traditional financial instruments.
DeFi enables services such as lending, trading and betting activities through the use of smart contracts.
A smart contract is executed by itself, without the need of a trusted third party. The agreement’s conditions between two counterparties can be directly written into lines of computer code. The code and the agreements are then recorded on a transparent, permanent public record called a blockchain.
There are generally five characteristics that make “DeFi” protocols and sets them apart from other cryptocurrencies. These characteristics are:
Non-Custodial. Users are the only ones who hold the keys to their wallets and control their funds.
Open. Just like the internet does for data, money is being transferred globally with no borders.
Transparent. The code for these financial applications is open, so anyone can inspect how these apps and protocols work, and track exactly where their money is.
Programmable. Open-source code also enables developers to build on top of others’ applications. If the devs don’t like the code, they can just copy it and build a new application.
Decentralized. DeFi protocols are built on public blockchains such as Ethereum or Binance Smart Chain.
Where DeFi Started
DeFi was made possible by the creation of smart contracts. The first broad usage of this was on the Ethereum blockchain launched in 2015. The term was first used in 2018 to describe the movement of open financial applications being built on Ethereum blockchain.
Since then, DeFi projects have been built on other blockchains as well. In the summer of 2020, many new protocols emerged and the DeFi sector exploded. The name for this time period came to be known as DeFi summer, as noted by CoinDesk.
Where DeFi is Today
As noted by the website, DeFi Llama, as of this writing there is over $114 billion in total value locked in DeFi applications, with users taking advantage of decentralized borrowing and lending services.
While the industry recently took a hit, by zooming out one can see that this figure is actually 25% over it was a year ago.
Nine different blockchains have DeFi ecosystems with over one billion TVL. The biggest of these is Ethereum, followed by Binance Smart Chain, Tron, Avalanche, Solana and Polygon.
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
