Decentralized finance, commonly referred to as DeFi, encompasses a broad realm of blockchain-based financial products and services. These include protocols, digital assets, decentralized apps, and smart contracts.
Rather than traditional, centralized finance, whereby transactions must be approved by key institutions such as banks or brokerages, DeFi is meant to be:
- permission-less and border-less, accessible to anyone with a mobile phone or computer connected to the internet,
- transparent, built on public ledgers that anyone can view,
- adaptable, with developers able to use, expand upon, and combine existing DeFi products in order to build new solutions,
- non-custodial, with each user holding the keys to their wallets and staying in control of their funds.
DeFi has expanded to encompass activities including lending and borrowing, trading, and insurance. Financial activity is defined by a smart contract; the code executes when the contract’s predefined conditions are met, without any need for human or institutional intermediaries.
Having begun to develop only in the past few years (with the launch of the Ethereum network in 2015 allowing for smart contracts, and the emergence of MakerDAO, Uniswap, and Synthetix in 2018–19), there are still many challenges being faced by the DeFi community, including technical and/or security risks linked to being a nascent industry.
Still, despite the challenges and relative newness of DeFi, its growth has been prodigious. In February 2020, there was a total of $1B in Total Value Locked (TVL) in DeFi protocols; by April 2021 this had increased to over $50B; and by the end of September 2021 the DeFi TVL was close to the $200B mark.
