Decentralized finance, or “DeFi,” is a blanket term for the various financial protocols and platforms built on Ethereum.
These protocols and platforms aim to provide an infrastructure that rivals centralized financial institutions like banks, exchanges, and lending platforms.
By deploying immutable smart contracts on Ethereum’s decentralized network, DeFi developers hope to create a more accessible, resilient, and transparent financial system.
The benefits of DeFi are numerous, but they can be boiled down to three core advantages:
1. Increased access to financial services
By deploying immutable smart contracts on Ethereum, DeFi protocols can offer their services to anyone with an Internet connection.
This is in contrast to traditional finance, which is often restricted by geographic boundaries.
2. Greater resilience
DeFi protocols are built on Ethereum, which is a decentralized network that is not subject to the whims of centralized authorities.
This makes DeFi protocols more resistant to censorship and shutdowns than their centralized counterparts.
3. Improved transparency
The use of smart contracts enables DeFi protocols to offer a high degree of transparency, as all transactions are recorded on the Ethereum blockchain.
This is in contrast to traditional finance, which often relies on opaque processes and intermediaries.
The advantages of DeFi have spurred rapid growth in the sector, with the total value locked in DeFi protocols increasing from $1 billion in January 2019 to over $13 billion in September 2020. This explosive growth has attracted the attention of mainstream media outlets, as well as institutional investors.
Despite this rapid growth, DeFi is still in its early stages and is subject to a number of risks. The most notable risk is the potential for smart contract vulnerabilities to be exploited, which could lead to the loss of funds locked in DeFi protocols. This risk was highlighted in June 2020 when a vulnerability in the MakerDAO protocol was exploited, resulting in the loss of over $4 million worth of Ethereum.
As DeFi matures, it is likely that these risks will be mitigated through the development of more robust protocols and increased scrutiny from investors. In the meantime, DeFi remains a highly exciting sector with immense potential.
Why is DeFi important?
DeFi is important because it represents a paradigm shift in the way that financial services are provided.
By deploying immutable smart contracts on Ethereum, DeFi protocols can offer their services to anyone with an Internet connection.
This is in contrast to traditional finance, which is often restricted by geographic boundaries.
In addition, DeFi protocols are built on Ethereum, which is a decentralized network that is not subject to the whims of centralized authorities.
This makes DeFi protocols more resistant to censorship and shutdowns than their centralized counterparts.
Finally, the use of smart contracts enables DeFi protocols to offer a high degree of transparency, as all transactions are recorded on the Ethereum blockchain.
This is in contrast to traditional finance, which often relies on opaque processes and intermediaries.
