A Brief Intro to DeFi

4-minutes Read

Bitcoin price started to drop after reaching its all-time high, while Ethereum (ETH) keeps soaring high. In May, Ether hit $4000 for the first time. In fact, top projects on Ethereum such as MKR, COMP and UNI also show great performance.  

(The graphs below illustrate the pricing trends as of May 6, 2021)

(Source: crypto.com)

You need to understand the definition of DeFi if you want to know more about the top projects on Ethereum, as they are all part of the DeFi ecosystem.

What is DeFi?

DeFi stands for Decentralized Finance. 2019 was named “Year of DeFi” when this buzzword created a lot of hype.

Traditional financial institutions such as banks are operating in a centralized model. When applying for a new bank account, you will need to submit KYC; when applying for a bank loan, you need to submit required documents for loan approval; if the bank becomes insolvent, you may suffer a loss of your deposit. Therefore, traditional financial systems have centralized controls. Customers allow a financial institution to manage their assets out of their trust for that entity.

Blockchain network can be considered as a decentralized “trust machine”. Decentralized and open-source protocols can be deployed to build a transparent peer-to-peer financial system, which mitigates the credit risks and lowers the financing cost.

In a DeFi system, there are no centralized authorities and trust is rebuilt by code that anyone can inspect and scrutinize. Since the protocols are open-source, anyone can build new financial products based on them. Moreover, there is no centralized entity to control the assets so users have absolute control over their own assets. Nowadays, the majority of DeFi projects are built on Ethereum due to its Smart Contract feature, which enables fast deployment of dApps.  

But this sounds demanding for the end-users. With increased autonomy, users also have to manage everything themselves so they need to have a certain amount of knowledge to get started. This was indeed the case. Despite explosive growth, the entire ecological development of DeFi is still in early stage.

Although decentralization is the characteristic of blockchain, not all finance projects on-chain are DeFi. In fact, centralized finance (CeFi) such as Huobi and Binance is still the mainstream due to better user experience.

Market Landscape

Total Value Locked (TVL) is the most commonly used indicator to measure the scale of a DeFi project. TVL measures the total value of the tokens locked in the Smart Contracts of these decentralized applications. In the past year, the TVL of DeFi ecosystem experienced rapid growth and it has reached approximately US$77 billion to this day.  

(Source: DeFi Pulse)

Among the top 10 DeFi projects, the majority are Decentralized Exchange (DEX) and lending platforms. MKR, COMP and UNI as mentioned above represent the Maker, Compound and Uniswap protocols respectively, and they are currently among the largest DeFi projects in scale.

(Source: DeFi Pulse)