An Intro to Defi
Content:
General Information-
What is Defi
Defi Products
Defi Currency
Defi Index Review
Closing Thoughts
General Information-
What is Defi
DeFi stands for decentralized finance. Decentralized finance is a new emerging industry that offers peer-to-peer services on blockchains without intermediaries. Defi relates to anything that is essentially decentralized. Most commonly, Bitcoin is known for being decentralized since its censorship-free money and accessible to anyone. Defi allows for a more open level playing field, a free market that allows everyone to participate, and censorship-free. Defi has sectors that we will briefly touch on in the next section.
2. Defi Products
Now that we know what Defi is, let’s talk about different sectors in Defi. Today there are many ways to interact with Defi like, lending, getting a loan, trading, saving for the future, and sometimes buying derivatives. Lending - users lend out their crypto assets and earn interest daily. Getting Loans - Users can receive loans that don’t require the long complicated process that we are used to. Trading - Using a decentralized exchange, users may buy or sell without a centralized entity. Saving - Similar to lending, users can earn yield by depositing in accounts to earn interest. Derivatives - Using leverage in Defi allows shorts or longs on assets. As you see, there are many different products that we are exposed to in Defi and some use cases are yet to come.
3. Defi Currencies
A Defi currency is a token that transfers value in the course of the transaction. Defi tokens today, are usually built on an existing network like Ethereum. To name a few, Chainlink, Aave, and Uniswap are amongst the most popular Defi coins. Some of the Defi coins interact with the network and some don’t. Chainlink’s oracle service requires a set amount of $link tokens to interact with it, and other networks might require no token to interact with it. Aave is a Defi loan service that allows users to borrow funds in $AAVE tokens as collateral, which potentially lowers their loan fees. Defi currencies provide different use cases, so it’s important to understand the protocol that you are interacting with.
4. Defi Index Review
Figure A
An index is somewhat like an ETF of the top Defi protocols. In this Defi index review, we will use $DEFI-PERP from FTX which uses a weighted average price of the top Defi blockchains. Feel free to click this sentence to learn about the exact crypto assets that make up this ticker. Currently, we saw a big run in the Defi sector yielding an average of 13x returns from July 2020 to May 2021. This strength displays that there is a use case for Defi despite the big drop that follows it. The overall chart is making higher highs and higher lows which shows growth. Additionally, according to Statistica the number of unique addresses that either bought or sold a Defi asset worldwide has been trending up since 2017. Defi products have proven to have increased demand over time.
Closing Thoughts
Defi is an incredible tool and provides opportunities for people that didn’t exist before. The most impactful part of Defi is getting loans without the hassle that exists in modern-day finance in my opinion. Some may not be able to get approved for loans or may not have the means of hiring professionals to help them secure loans. Whatever the case may be, Defi levels the field and offers users a chance. It allows users to get services without any hassles, and without any middlemen more transparently. On the other hand, there are also risks associated with Defi just like anything else in the world. But as for the whole sector of Defi, the future is bright and we are at the very early stages of its true capabilities. This makes me excited to watch what will come next out of the Defi world as the possibilities are endless.