WTF Is DeFi?

Open and Decentralized Finance (DeFi) is the new hoot in the blockchain world.

The goal of DeFi is to rebuild the entire financial system from the ground up in an open and permissionless way.

The idea is to separate money from politics. Since the beginning, central authorities like governments and national banks have been at the heart of all financial decision-making. Ordinary people usually have very little say in how these institutions handle their money.

‍DeFi empowers everyone to take back control of their finances.

Let’s not forget that central banks are also people! People make mistakes. Remember the 2008 financial crisis? 10,000,000% inflation in Venezuela? These are terrible mistakes made by people!

The power in the financial world is highly centralized. More than half of global VC funding goes to U.S. startups, most of which are in a few cities like San Francisco and New York City. Meanwhile, even in the U.S., the bottom 80 percent of society own only 7 percent of company shares, and individuals in many other nations do not even have access to stock markets. Finance is central to the global economy, but it is not an open system. [Source: https://blog.zerion.io/]

DeFi has the potential to decentralize power and pave the way for an open economy, and in turn open finance.

Imagine DeFi as an open financial ecosystem where anyone can build financial tools and services (Thanks to the blockchain community, almost all protocols are open source.) These tools and services would be built on top of a blockchain, so they can be integrated with one another to create value.

DeFi gained momentum on the Ethereum blockchain in 2016 with dapps like:

• EtherDelta: Decentralized P2P trading platform for ETH and ETH-based (ERC20) tokens
• WeTrust: Financial inclusion leveraging DLT
• Etherisc: Decentralized insurance

But this was just the beginning!

In 2017, more DeFi projects started to emerge like:

• DAI: Decentralized stablecoin pegged to USD
• VariabL: Ethereum blockchain derivative trading platform
• EthLend: Decentralized lending

And here we are!

In 2019, DeFi dapps started to form an ecosystem with a variety of projects completing the financial services full circle:

• Augur: Decentralized prediction market platform
• bZx: Decentralized margin lending
• dYdX: Decentralized protocol for crypto derivatives
• Compound protocol: Earn interest on and borrow crypto to invest, use, or short-sell
• Kyber Network: Decentralized token swap.
• MelonPort: Crypto asset management
• 0x: Decentralized exchange
• Dharma: Decentralized borrowing-lending marketplace. Dharma Lever is built on top of Dharma protocol.

To know more, check out this list of cool DeFi projects.

‍

‍

The infrastructure for the modern digital economy is almost in place, the number of DeFi projects is increasing, more investors are interested in DeFi, yet not a lot of people are using it.

By the end of 2018, the U.S. banking system had $17.9 trillion in assets. According to DeFi Pulse, as of 23rd November 2019, total value locked in Ethereum-based DeFi is $648.1 million. There is a gap of about 30,000x at the moment.

‍

‍

There are many reasons why DeFi adoption is far from reality today:

1. Many DeFi projects are managed by companies that lack accountability and transparency. Example: Facebook’s Libra
2. Access points to cryptocurrencies are still majorly centralized. Example: Coinbase. There are some Decentralized Exchanges (DEX) but they do not observe substantial volume because of their poor UI/UX.
3. Trusting in a DeFi project can be tough. Transparent and open doesn’t mean easy to understand. For complete trust, someone needs to verify the smart contract code to ensure that there is no room for any backdoor entry for a hacker. This can be particularly challenging for ordinary people.
4. Getting on board with blockchain tech is hard! Ordinary people are not well acquainted with the idea of cryptography, cold storage, etc.
5. DeFi is convoluted! Chances are that you would have to do a lot of homework before actually leveraging DeFi to gain value.
6. People who could benefit the most from open finance are from regions where blockchain education or access to these tools is lacking.

Of course, there are probably many more reasons why DeFi adoption is low, but these 6 are at the top of the list.

BUT…

This does not mean that DeFi will die off. We are hopeful that the DeFi ecosystem will mature as usability and accessibility improve. TryCrypto is on a mission to make decentralized technology easy for everyone and we believe creating simple, easy-to-understand content is an important part of making this technology more accessible.

‍

‍