DeFi is a way of doing financial business without relying on traditional institutions like banks and credit card companies. Instead, DeFi uses peer-to-peer networks, blockchains, and other new technologies to connect people directly. This eliminates the need for intermediaries and central oversight which is common in traditional financial systems. In these traditional systems, banks and other third-party companies facilitate every step of moving money from one person to another.
DeFi aims to enable secure transfers without the need for third-party scrutiny, which can come with high costs, privacy concerns, and delays. This is achieved by using decentralized networks and technologies that enable direct transactions between individuals, without the need for intermediaries. In this way, DeFi provides a more streamlined, efficient, and private way of conducting financial transactions.
Tools of DeFi
DeFi has gained popularity among cryptocurrency enthusiasts due to the capabilities of the Ethereum network and smart contracts. Through DeFi, participants can lend, borrow, and trade cryptocurrencies using individual tokens, stablecoins, exchanges, networks, and decentralized apps.
Ethereum and smart contracts have played a crucial role in the development of DeFi because of their ability to support protocols. DeFi protocols are simply sets of codes, procedures, and rules that govern the systems used in DeFi. These protocols allow participants in the ecosystem to trade, lend, stake tokens, and engage in other activities. It’s important that these protocols are accessible to all wallets so that everyone participating in the DeFi system can follow the same set of rules. By using these protocols, DeFi enables a more transparent and fair financial system that is accessible to everyone.
By and large, DeFi protocols are autonomous programs that run on blockchain networks like Ethereum. They aim to make traditional financial processes better. For instance, DeFi programs can combine data from different crypto exchanges to make trading easier for users. They do this by creating pools of trading and liquidity that simplify transactions.
Understandably, many DeFi protocols use complex procedures to simplify and increase accessibility for users. When comparing different protocols, one useful metric is Total Value Locked (TVL). TVL refers to the total supply of tokens being secured by a particular DeFi application. As of mid-2022, the biggest DeFi protocol by TVL (which means the total value locked in the protocol) is MakerDAO. In June of that year, MakerDAO had a TVL of more than $7.5 billion. MakerDAO enables users to borrow and lend crypto tokens by locking their crypto assets in exchange for tokens of a stablecoin called DAI. People who use MakerDAO can lend and borrow, and MakerDAO uses smart contracts to sell the collateral if someone can’t pay back the loan. This helps make sure that the digital currency called DAI stays stable.
One of the impressive aspects of DeFi protocols is their versatility. They offer users the ability to move assets between different blockchain networks, exchange different types of assets, create their own liquidity pools, borrow and lend money, and engage in more complex investments such as derivatives. DeFi protocols even offer users the option of putting their money into savings accounts or riskier investment options.
Some of the Most Popular DeFi Protocols
Besides MakerDAO, some of the other well-known and widely used DeFi protocols include:
- AAVE: AAVE is a lending protocol that has its own native token, also called AAVE.
- UniSwap: UniSwap is a type of decentralized exchange that works in DeFi. When people provide money to UniSwap, they can earn UNI tokens that belong to the platform.
- 0x Protocol:0x is a platform that lets people move their digital assets from Ethereum to Polygon, which usually has lower fees.
- Curve: A curve is a tool that combines digital assets that have the same value, like stablecoins. This helps people manage their money more efficiently.
- Compound: Compound is a DeFi platform that lets people lend and borrow money without using a traditional bank. It’s like a marketplace that connects borrowers and lenders. People can lock up their cryptocurrency to participate in the loan market.
- DeFi stands for decentralized finance. It tries to replace traditional financial systems with peer-to-peer networks that don’t rely on third parties for control.
- The most important thing about DeFi is the growing number of protocols, which are like rules that guide how DeFi works for people who use it.
- Total value locked (TVL) is an important measure used to understand how big and successful various DeFi protocols are.
- MakerDAO was the biggest DeFi protocol as of mid-2022, with a TVL of more than $7.5 billion.
- DeFi protocols enable people to do a variety of things, such as borrowing and lending money, saving money in alternative savings accounts, investing in derivative products, and many other activities.