What is decentralized finance (DeFi)?
Recreates traditional financial systems in a decentralized manner using smart contracts (automation in place of middlemen)
Examples: lending, borrowing, derivatives, exchange
Financial building blocks or “money legos” can create more complex capabilities
Image source: https://medium.com/totle/building-with-money-legos-ab63a58ae764
Almost $80 billion locked in DeFi
Image source: https://defipulse.com/
Stablecoins
Not ideal in all financial transactions to use a cryptocurrency that has price volatility e.g. taking out a loan
Stablecoins aim to reduces price volatility (many pegged to USD)
Centralized stablecoins backed 1:1 by fiat in a bank account e.g. USDC
Decentralized stablecoins can be crypto collateralized or algorithmic
Image source: https://medium.com/ethex-market/which-stable-coin-is-best-for-you-2167d0d9f520
Maker
Decentralized stablecoin on Ethereum that is overcollateralized by crypto
Stablecoin DAI can be minted by anyone through locking up crypto as collateral to take out a DAI loan e.g. lock up $200 of ETH to borrow $100 of DAI
If price of collateral drops, then assets are seized and liquidated
Common use case is leverage
Image source: https://makerdao.com/
Decentralized lending and borrowing
Lend or borrow directly from smart contract
Some have interest rates that dynamically change based on supply and demand e.g. Compound and Aave
Provide collateral in crypto in order to borrow funds (loan needs to be overcollateralized)
Image source: https://loanscan.io/
Decentralized exchange (DEX)
Anyone can trade assets that conform to token standard (e.g. ERC-20, ERC-721)
Can have decentralized order books that look like traditional exchange e.g. 0x, dYdX
Automated market maker (AMM) provides pricing algorithmically based on liquidity available and will always provide a price e.g. Uniswap, Sushiswap
Aggregators pull liquidity from all e.g. Matcha, 1inch
Image source: https://app.uniswap.org/#/swap, https://medium.com/scalar-capital/uniswap-a-unique-exchange-f4ef44f807bf
Over $60 billion in monthly DEX volume
Image source: https://duneanalytics.com/hagaetc/dex-metrics
Token governance
Token holders vote on direction of project or various parameter settings e.g. Maker (MKR) holders can vote on parameters such as fees charged
Can be referred to as a decentralized autonomous organization (DAO)
Image source: https://vote.makerdao.com/polling
Liquidity mining
Projects distribute governance tokens to community
Often reward adding liquidity through “liquidity mining”
Different levels of rewards based on requirements e.g. lock up for longer, reward vesting, retroactive rewards
Image source: https://curve.fi/
Flash loans
Someone can borrow funds and repay in same transaction
If not repaid in same transaction, then it fails
Enables uncollateralized loans
Common use case is for arbitrage opportunities in DeFi
Image source: https://etherscan.io/tx/0xb5c8bd9430b6cc87a0e2fe110ece6bf527fa4f170a4bc8cd032f768fc5219838
Composability with DeFi
Interesting possibilities when combining DeFi building blocks or “money legos”
For example PoolTogether is a “no-loss” lottery: users purchase tickets and all proceeds go into a prize pool that earns yield from DeFi protocols Compound and yEarn vaults. Everyone gets funds back but one person wins all of the interest on pooled money
Image source: https://pooltogether.com/
Composability with DeFi and NFTs
Interesting possibilities when combining DeFi building blocks and NFTs
For example, NFTFi allows you to use NFTs as collateral in taking out a loan ranging from wallet names to virtual land
Image source: https://nftfi.com/