1) Introduction
The term DeFi or Decentralized Finance is the evolution of the well-known FinTech that were born in the twentieth century. Its objective is to offer a whole range of services built on a decentralized infrastructure. One that allows the user to interact with the platform directly, leaving the intermediaries behind.
Something that has finally been possible thanks to the emergence of Blockchain technology. This is due to its ability to generate self-sustaining ecosystems without the need for a central entity to regulate them. All while maintaining system security, privacy and trust.
2) The birth of DeFi
The birth of DeFi as we know it started on the Ethereum blockchain. Ethereum's ability to offer flexible smart contracts was what made this step possible. By 2018, Ethereum had already active one 15 projects dedicated to DeFi. Mainly projects dedicated to liquidity markets, lending systems and Decentralized Exchanges (DEX).
Most of them just moved their traditional counterpart to the world of Smart Contracts and blockchain. But the really revolutionary point in this experience was the fact that it was totally decentralized. Without intermediaries, without annoying paperwork, fast and secure, it was the birth of a new era for finance.
Since then, the growth of DeFi in the world has been growing more and more. But not only that, many specialists agree that it will become an important part of the world economy and finance.
3) Operation of DeFi platforms
The operation of DeFi is possible thanks to blockchain technology and one of the tools derived from it, smart contracts. The concept of smart contracts was created by cypherpunk Nick Szabo in 1994. Szabo conceptualized them as an autonomous program capable of executing a series of instructions or clauses according to whether a series of instructions had been complied with. It was the equivalent of a legal contract but brought to the computer world and enhanced with the ability to be autonomous and completely anti-cheating.
Nick Szabo's vision was ahead of its time. He had to wait until the appearance of Ethereum when he was finally able to see a smart contract working. It wasn't perfect, but it was enough to start building new things. That was how Dapps or Decentralized Applications were born, programs that ran directly on the Ethereum blockchain and with which we could interact using tokens and a browser. A second advance that finally opened the doors for the construction of the DeFi.
Smart contracts, the building blocks of DeFi
The functioning of any DeFi platform is precisely the union of these two creations. A smart contract (or a series of them) that has the ability to handle money autonomously and a Dapp that allows us to interact with that smart contract in a simple way. All this running on the blockchain, where each action is recorded permanently and inalterable.
All this was realized in 2016 with the creation of Ethereum's The DAO. This was an Autonomous Decentralized Organization or DAO, whose function was to allow its participants to exchange their money for different projects through proposals. An action that was possible only with the vote of the majority of the participants accepting this proposal. The DAO quickly transformed into one of Ethereum's largest projects. But a security problem drove the project to its worst, following the theft of $ 50 million in ethers.
Despite the attack and the known risks, the community continued to develop the concept of DeFi. With the ICO boom in 2017 many DeFi projects received funding to achieve their plans. This is how the world's first DeFi platforms were born, many of which are still working today.
4) DeFi platforms today
Currently there are a wide variety of active DeFi platforms, many of them were born in the ICO boom of 2017. Each and every one of them has its pros and cons, and most run on the Ethereum blockchain. All this has made Ethereum stand as the most important blockchain for the DeFi movement.
But let's know some of these DeFi platforms and that they offer us:
MakerDAO
MakerDAO is a well-known DAO that runs on Ethereum, with the purpose of creating a DeFi ecosystem powered by its token Maker and its dollar-anchored stablecoin, the DAI. The MakerDAO system allows the value of the token Maker to stabilize the value of DAI through a dynamic system of Secured Debt Positions (CDP), autonomous feedback mechanisms and duly incentivized external actors.
This way, users can leverage their Ethereum assets to generate DAI on the MakerDAO platform. Once generated, the DAI coin can be used in the same way as any other cryptocurrency. So you can protect money or participate in the extensive system of Ethereum Dapps that accept DAI as a means of payment.
For example, it is possible to access a Dapps of decentralized loans on Ethereum and pay with DAI an equivalent amount in dollars in a matter of a few minutes. In addition, there are other platforms that offer the payment of interest for saving money using DAI, as if it were a traditional bank. And even, we can use our DAI on loan platforms, to offer peer-to-peer (P2P) loans for which we will earn a certain interest.
AAVE
AAVE (formerly ETHLend) is a DeFi platform dedicated to decentralized lending. The platform is primarily focused on offering users of Ethereum and several major tokens running on this blockchain, a fast and secure platform to access loans. To do this, AAVE has a large number of features ranging from exchange, repayment, redemption, deposit, payments, tokenization (with issuance and burning of tokens own platform).
0x
Another widely known DeFi platform is 0x. This platform runs on Ethereum and is focused on building decentralized exchanges (DEX). With this, 0x seeks to change the strangest paradox in the crypto world: its centralized exchanges. Exchange platforms such as Binance, Bitfinex or Poloniex are centralized platforms, where their owners can make the decisions they want and manipulate such exchanges.
This situation clashes head on with the decentralization promoted by the blockchain. That's where 0x wants to be a factor of change. To achieve this, 0x has created a series of smart contracts that we can use to create our own secure decentralized exchanges.
Augur
Augur is a DeFi platform focused on building an oracle to conduct prediction markets. The name of the platform comes from a Roman word used to identify priests with gifts of divination.
The goal of Augur is to offer its users the opportunity to develop markets in which other users can bet. It uses the "Wisdom of the Crowd" of the platform's predictors and winners to create near-accurate real-time predictive data. To achieve this, Augur uses the Ethereum blockchain and all its activities are stored in the history of its REP token.
As you can see, DeFi is not just money management, it is much more than that. The diversity of uses of DeFi is immense and largely unexplored. The platforms listed here are just some of the existing platforms.
5) Importance of DeFi in the blockchain ecosystem
defis are increasingly becoming a major player in the blockchain ecosystem. Beyond activities like HOLD or staking, DeFi allows cryptocurrency users to create new ways to produce money and increase their investments. In addition, the constant increase in cryptocurrency users and the enormous economic potential of blockchain such as Bitcoin, does nothing more than improve the future estimates of this sector. Especially when it is known that there is more than $ 1 billion in liquidity in these markets.
But beyond the blockchain ecosystem and its users, defis can open the doors for traditional investors to finally be tempted to enter the ecosystem. The injection of liquidity by these investors would dramatically increase the liquidity of crypto markets and create a whole bonanza of services that underpinned the presence of blockchain in the world.
Given this scenario, it is understandable the vital role that DeFi have in the blockchain ecosystem, a role that could lead to the worldwide massification of this technology and took us deeper and deeper into the economic and financial revolution that Satoshi Nakamoto sought with the creation of Bitcoin.
Alejandro O. Asharabed Trucido
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