This article is aimed at novices/novice, try to use the simplest way to tell you what DeFi is - this is almost the hottest and most popular word in 2021. Veteran players please bypass.

DeFi is the abbreviation of Decentralized Finance, Chinese, decentralized finance, it refers to the application on the public blockchain, aiming to create financial services without a central intermediary. DeFi is a potential, long-term, world-changing future where individuals coordinate financial activities globally peer-to-peer.

What is DeFi?

What is DeFi?

Bitcoin started the decentralization revolution by providing individuals with a fixed, non-sovereign digital store of value. However, a strong financial system requires more than a single asset. Users want services and products that enable them to invest their money. This is where DeFi comes in, which stands for infrastructure such as the lending platforms and exchanges needed to innovate on top of the traditional financial system.

DeFi stands for distributed/decentralized finance. What does it mean? DeFi is a broad term for various financial applications that use cryptocurrencies or blockchain technology to solve problems that exist in the traditional financial system.

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DeFi and Ethereum

Today, most of what is called DeFi lives as code on a blockchain (mainly Ethereum). Ethereum is an open-source blockchain-based distributed computing platform for building decentralized applications. Ethereum sets itself apart from the Bitcoin platform because it makes it easier to build other types of decentralized applications beyond simple transactions. Through programmability and interoperability, Ethereum enables new types of financial instruments and assets that are more customizable than existing products and services.

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Is DeFi useful?

DeFi applications are useful because they allow anyone in the world to access financial services offered on public blockchains, eliminating intermediaries and high barriers to entry. Some 1.7 billion people are unbanked, and two-thirds of the unbanked own a smartphone. DeFi has the potential to open up essential financial services, including the ability to borrow, lend, deposit funds into savings accounts, or trade complex financial products without asking anyone for permission or opening an account anywhere.

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Examples of current DeFi applications

Some examples of DeFi applications include lending, spot trading, derivatives trading, stablecoins, asset management, prediction markets, and synthetic asset creation.

I have already classified and defined the DeFi field, you can take a look. In order for a token (that is, a token as we often call it) to constitute "DeFi", the token must meet the following requirements:

• Financial use cases: the protocol must explicitly target financial applications, such as credit markets, token swaps, derivatives/synthetic asset issuance or exchange, asset management, or prediction markets;

• Unlicensed: the code is open source, allowing any party to use or build on top of it without going through a third party;

• Pseudonyms: users do not need to disclose their identities;

• Non-custodial: Assets are not held in custody by a single third party;

• Distributed/decentralized governance: individual entities do not have escalation decision and administrative privileges, or at least there is a reliable path to remove them;

borrow money

borrow money

DeFi protocols enable users to borrow and lend assets. Currently, all DeFi loans are currently over-collateralized, meaning users must post more collateral than they have borrowed. This dynamic is similar to a mortgage, where an individual pledges their home as collateral and takes out a mortgage. Using DeFi protocols, users can post various assets as collateral and borrow against them other crypto assets, including stablecoins. When the value of a borrower's collateral falls below a specified loan-to-value ratio, its collateral is liquidated to ensure the protocol remains solvent.

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Decentralized Exchange (DEX-Decentralized Exchange)

Decentralized exchanges (DEXs) are peer-to-peer marketplaces that allow the direct exchange of cryptocurrencies between two interested parties. DEXs are designed to solve problems inherent in centralized exchanges, such as centralized custody of assets, geographic restrictions, and asset selection. Today's most popular DEXs use automated market-making systems rather than traditional order books. Instead of matching individual buy and sell orders, users can deposit assets into a pool and then trade them at prices determined by the ratio between assets in the pool. Such a DEX allows users to passively provide liquidity to create a market for any asset on Ethereum, as well as provide traders with always-available liquidity.

stable currency

stable currency

Stablecoins are cryptocurrencies designed to maintain price stability against another asset. These assets can be pegged to fiat currencies such as the U.S. dollar, other cryptocurrencies, or precious metals. The main benefit of these assets is price stability (duh), which is important because most cryptocurrencies are extremely volatile and thus difficult to trade. By far the most popular stablecoins are price-stable against the U.S. dollar, and there are usually three stablecoin implementations: fiat-collateralized (each stablecoin is backed by fiat currency in a bank account), crypto-collateralized (each stablecoin has Backed) by cryptocurrency in smart contracts) and algorithmically (each stablecoin is backed by an incentive system to ensure price stability at its target level). In addition to price stability, stablecoins provide a borderless payment system that is faster, cheaper and more secure than traditional networks like SWIFT.

synthetic assets

synthetic assets

Synthetic assets are financial instruments that simulate the value of another asset. There are many ways to implement this simulation of value. However, this is usually achieved through the use of price oracles to ensure the asset tracks its target value. There are endless possibilities for the types of synthetic assets that can be created using cryptoassets, and the presence of these assets on public blockchains such as Ethereum means more open access for global investors. Before assets are created, only a select few have access and permission to enter the global financial market. Synthetic assets can provide value to investors such as more diversified capital allocation, hedging opportunities to hedge risk, and tools to increase investment returns.

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Derivatives - options, futures and perpetual contracts

The traditional financial definition of a derivative is a contract that derives its value from the performance of the underlying entity. This underlying entity can be an asset, index or interest rate and is often simply referred to as the "underlying". While traction has so far remained limited relative to other DeFi protocols such as lending, exchanges, and stablecoins, derivatives exchanges have seen volumes grow tenfold over the course of 2020. Platforms like Synthetix, Yearn Finance, and Hegic help empower DeFi derivatives with effectiveness and agility.

prediction market

prediction market

Prediction markets are platforms created to trade the outcome of events such as games, elections, etc. Market prices can indicate the crowd's perception of the likelihood of an event. The main difference between decentralized prediction markets and centralized prediction markets is that the former are built on public blockchains, which means that no single authority can control them. This makes these networks more flexible, more secure, cheaper, more open, less regulated and less subject to censorship. It gives them some other advantages. Some of these advantages include: fees tend to be minimal and tend to zero over time, anyone can trade and create markets based on any outcome, participants don't need to trust anyone to hold their funds, and decentralized prediction markets More resistant to censorship and corruption.

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Why Institutions Might Be Interested in DeFi

2020 is recognized as the year institutions start buying bitcoin (in the crypto community), and there are early signs that ethereum will also gain more traction with the launch of ethereum futures by the CME in early 2021.

These are signs that institutions are taking a path that starts with Bitcoin, leads to Ethereum, and eventually heats up to DeFi. Don’t just take my word for it, a recent example might come from The Block’s “Developing a Digital Asset Strategy” panel. During the panel discussion, the head of Morgan Stanley's digital asset markets division said: "I would say that this current momentum of strong interest in [DeFi] will continue into 2021" and "I think some of DeFi's These technologies will definitely take advantage of this phase in some more regulated way during 2021-2022." Although DeFi is a growing industry in the crypto industry, these are positive comments and signs of market maturity.

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The Potential Future of DeFi in 2021

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Image source: DeFiPulse

Written at the end - what other thoughts about DeFi

While these new financial protocols are experimental and not without their issues, DeFi is still building exciting applications with real-world use cases that have the potential to democratize finance. Although institutions have only studied Bitcoin and Ethereum so far, they will gradually be educated on DeFi protocols and hope to use them to create a more open and transparent financial system. A decentralized financial system will reduce fees and improve existing inefficiencies, but more importantly, it will provide financial services to the millions of individuals who are currently underserved.