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Decentralized Finance is being recognized as a paradigm shift in the way financial markets operate. While Fintech disrupted the way banking and investing is being distributed and accessed, DeFi goes deeper and behind the scenes.

Efi Pylarinou
Efi Pylarinou
Founder of Efi Pylarinou Advisory
Dr. Efi Pylarinou is the No.1 Global Woman Influencer in Finance & the Data conversation by Refinitiv 2019 & 2020. A seasoned Wall Street professional & a recognized technology thought leader on innovation topics in financial services.
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Decentralized Finance is being recognized as a paradigm shift in the way financial markets operate. While Fintech disrupted the way banking and investing is being distributed and accessed, DeFi goes deeper and behind the scenes.

We can describe DeFi, as a decentralized way of producing financial products with processes managed by smart contracts (instead of intermediaries) on a ledger during the entire life-cycle. DeFi handles deposits, loans, investments, all managed on blockchain ledgers via smart contracts.

DApps, are the various decentralized applications built mostly on the Ethereum blockchain because of its smart contract capabilities.

The basic building 'tools' needed to operate in the DeFi world, are a non-custodial wallet, a Decentralized exchange, and a DApp. DeFi natives use software or hardware non-custodial wallets or so-called self-custody wallets (e.g. MetaMask or Ledger) for holding their digital assets (cryptocurrencies or stablecoins). They may need access to a Decentralized Exchange (DEX) to buy or sell the specific digital asset needed in the Dapp.

A non-custodial wallet is a wallet that holds digital assets without a 3rd trusted party. It requires no KYC or identification. The owner of the wallet owns the private and public keys.

In DeFi parlance, we refer to the amounts locked in DeFi blockchain or DApps. These metrics are indicators of adoption as most DeFi ventures require collateral or staking. The market monitors the amount of ETH locked up or its USD equivalent in all the DeFi world, as DeFi has mainly been built on the Ethereum blockchain.

Just over a year ago, the entire amount of Ethereum locked in all the Defi space, was hovering below $1million or ETH 2.75million (c. mid May, 2020). The explosion of Defi tokens ironically, started after the March market lows. The amount locked in Defi crossed $1billion in June 2020, then crossed $10bilion (ETH 7million) after mid-September and currently, we are above $60 billion. We are now hovering around the 10 million ETH locked in all the Defi space.

The more interesting aspect of the growth in the DeFi space, are the various subsectors that are being developed as we speak. Lending was the first growing DApp subsector with several players, like MakerDao, Aave, and Compound. Decentralized lending has been the reason that several (centralized or not) applications can offer high interest rates on certain cryptocurrencies and stablecoins that are in demand.

Decentralized exchanges (DEXs) are the second largest DeFi subsector, with Uniswap, Curve Finance, and Sushiswap being the largest ones.

Decentralized Derivatives and Assets are smaller but growing subsectors. Synthetix and Yearn.Finance are the top DApps, respectively.

There are also new Defi protocols, like the Avalance Blockchain. Defipulse covers all these ventures.

The Defi world is experimenting with decentralized ways of all the basic conventional building blocks of finance: trading spot (i.e. swaping one asset for another with no intermediary and no one holding your assets), trading on margin or getting funded, lending-borrowing, and investing.

The non-custodial aspect in financial transactions is core to DeFi.

DeFi is also a genuine innovation in the governance of financial transactions, as several DeFi Tokens include voting rights and built-in financial incentives participation.

DeFi is an enabler for deeper democratization in financial markets by incentivizing & compensating participation in the manufacturing of financial processes.

DeFi has introduced the innovation of governance tokens that act as an incentive and reward to token holders. For the first time, we are combining voting rights with financial rewards.

DeFi right now is offering rewards for those taking the risks of experimenting with DEX protocols. Even though these rates are not sustainable, these protocols and Dapps are showing us a new way for governance. The traditional financial world is taking serious notice now. ING published in early May a white paper in which they foresee that the current centralized financial world will adapt DeFi innovations for several reasons.

The top DApps from each of the four main DeFi subsectors are MakerDao, Uniswap, Yearn.Finance and Synthetix.

MakerDao is the top lending DApp. In plain words, one can lend ETH, BAT, or USDC holdings and earn high interest on the algorithmic stablecoin $DAI which is over collateralized by these digital assets. The interest rates are algorithmically driven and the $MKR token is a governance token for voting on what tokens to add as collateral and the degree of overcollateralization.

Uniswap is currently the top DApp amongst Decentralized exchanges (by market capitalization). In plain words, Uniswap is an Automated Market Maker (AMM) that creates liquidity pools so that instead of an order book acting as the backbone of an exchange, we have smart contracts processing the transactions needed to swap one asset with another. The holders of the $UNI token have both voting rights and a share of the DEX fees.

Yearn.Finance is the leader currently in yield farming. This is the next generation of Staking tokens. In plain words, you lock up your holdings in a lending protocol and you earn interest plus governance tokens ($YFI); and you are not stuck in one protocol, but you can move across protocols and get the best interest available.

Synthetix is the leader in the Derivatives DeFi subsector. In plain words, anyone can create a synthetic asset (Synths) with collateral either fiat currencies, commodities, or any other asset. This enables the participation in liquidity pools of DEXs and in any DApp in the DeFi world. $SNX token holders have voting rights and earn fees from their activities.

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