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Basics

  • "DeFi is essentially just conventional financial tools built on a blockchain. They are mostly predicated on open-source protocols or modular frameworks for creating and issuing digital assets and are designed to confer notable advantages of operating on a public blockchain like censorship-resistance and improved access to financial services."
  • DeFi has also been referred to as “Open Finance”. The official term #DeFi was coined in Q3 of 2018.
  • Sites such as DeFi PulseMakerScan and Loan Scan are common reference points.
  • "Many DeFi tracking sites use Total Locked Value (TVL) as a reference point. Simply put, TVL represents the amount of assets that are currently being staked in a specific protocol. This value is by no means meant to represent the amount of outstanding loans, but rather the total amount of underlying supply being secured by a specific application and/or by DeFi as a whole."

History

From Dose Of DeFi (27-10-2020):

"The Proof-of-Concept phase, saw teams building financial products on Ethereum without a catchy name; many spawned from the euphoria of 2017 (or before). Projects like Maker, 0x, Kyber, dYdX, Synthetix, Uniswap and Compound were built only to be later referred to as DeFi.

In 2018, they were just one of many projects on Ethereum, sometimes bundled under the “Web3” moniker, but not particularly memorable. Their success, in particular Maker and its Dai stablecoin, created an organic community that soon rallied under the ‘DeFi’ banner, jointly conceived by teams at Set, Dharma and 0x as the name of a telegram group."

Usage

  • As of now (9-2019) Ethereum is the big leader in DeFi projects. Almost 5% of total ETH in circulation is already in DeFi smart contracts (31-8-2020).
  • "Daily activity across all dapps running on Ethereum was up 104% year-on-year (31-3-2020), with DeFi activity up 294%. Activity on TRON rose 8%, while activity on EOS plunged 80%."

"DappRadar, a site that ranks and tracks decentralized apps (dapps), issued a report this week that shows how in the third quarter of this year, transaction volumes in the DeFi world hit $125 billion, an increase of $113 billion since 2020's second quarter. 96% of the total transaction volume took place on the Ethereum blockchain."

"Similar to market cap, DeFi usage as measured by daily active addresses also peaked in September. Following the initial airdrop there were over 176K UNI active addresses on September 17th, by far the largest amount in DeFi history. But since then UNI daily active addresses have rapidly declined and leveled off at about 5K per day." 

How decentralized is DeFi?

As of 2-11-2019 it lists the following projects: Compound, dYdX, Fulcrum and Nuo

As of 2-11-2019 it lists the following assets: DAI, USDC, ETH, WBTC, REP, ZRX, BAT and TUSD

  • From this comprehensive blog post (25-4-2019) of HackerNoon (A BIG side note, is that the blog was written by Kyle J Kistner who is Chief Vision Officer at bZx. He gave his own project the highest ranking. What a surprise):

"CeFi: CeFi products are custodial, use centralized price feeds, initiate margin calls centrally, centrally determine interest rates, and centrally provide liquidity for their margin calls. Examples include SALT, BlockFi, Nexo, and Celsius.

Degree 1 DeFi: These DeFi products are non-custodial but use centralized price feeds, centrally initiate margin calls, centrally provide liquidity, centrally determine interest rates, and centrally administer platform developments & updates. Examples include Dharma.

Degree 2 DeFi: These DeFi products are non-custodial and have one additional decentralized component which could include price feeds, initiation of margin calls, margin liquidity, interest rate determination, or platform development, while the rest are still centralized. Examples include Expo, Nuo, and ETHLend.

Degree 3 DeFi: These DeFi products are non-custodial, have permissionless initiation of margin calls, and permissionless provision of margin call liquidity, while centrally administering price feeds, centrally controlling interest rates, and centrally controlling platform developments and updates. Examples include Compound, MakerDAO.

Degree 4 DeFi: These DeFi products are non-custodial, have permissionless margin calls, permissionless provision of margin call liquidity, and decentralized price feeds, but centrally determine interest rates and centrally control platform developments and updates. Examples include Fulcrum and dYdX.

Degree 5 DeFi: These DeFi products are non-custodial, have permissionless margin calls, permissionless provision of margin call liquidity, decentralized price feeds, and decentralized interest rate determination, but centrally control platform developments & updates. Examples include bZx.

Degree 6 DeFi: Every component in these DeFi protocols, including development, is decentralized. There are no existing examples, as no DeFi protocol is completely decentralized."

Critiques on security and decentralisation of DeFi

"Clifford mentioned bug bounties, security audits and formal verification as ways DeFi networks can de-risk themselves as platforms for earning fixed-income returns on crypto. Human risk is a factor, too: “You really are thinking about counterparty risk as the main one. … And that comes in many forms, actually. Many of these DeFi contracts, they have administrator access that can do various things with those funds at the contract level. This is kind of an early stop-gate for many of these smart contracts to go live before they can be truly decentralized. That’s something to think about. It says it’s a DeFi protocol but often there’s a single organization that has keys to it."

Whether or not there's human counterparty risk to consider, there's always technological counterparty risk, Clifford said, which can be evaluated along the lines of a Lindy effect: "Often, the smart contracts themselves, they act as a counterparty in a way, and they need to be vetted for technology risk. … What you’re really looking for is smart contracts that have had a lot of value custodied within them. The more time that’s elapsed, the safer it tends to be. If the contract’s held a billion dollars for several years the odds of it having a serious vulnerability diminish over time."" 

The Main Components of DeFi

DeFi DEX's

"Decentralized exchanges allow users to swap their digital assets without having to transfer custody of the underlying collateral. DeFi DEXs aim to provide trustless, interoperable trading across a wide range of digital asset markets. Depending on the specific DEX in question, users may benefit from anonymous transactions, automatic order matching and/or profit sharing."

Well known DEX's are:

DeFi Lending

"DeFi allows any individual to take out or supply a loan without approval from a third party. As such, the large majority of lending products tend to use popular cryptocurrencies such as Ether ($ETH) to secure outstanding loans. Seeing as digital assets have been known to exhibit strong price volatility, it’s common practice for lending platforms to require borrowers to supply an average of 150% collateralization to initiate a loan. Furthermore, the advent of smart contracts allows for maintenance margins and interest rates to be programmatically encoded into an agreement. As such, liquidations occur automatically if one’s account balance falls below a specified collateral ratio. To date, lending has dominated as the leading DeFi use-case."

Well known projects are:

DeFi Assets

"With the programmable Store of Value (PSoV) proposition in mind, it’s no surprise that digital assets based on different protocols are looking to leverage the benefits Ethereum’s blockchain provides. DeFi tools provide the foundation for assets such as bitcoin (BTC) to be represented as ERC-20 tokens. In practice, the process of wrapping allows for digital assets (BTC) to be secured by decentralized custodians and represented as a new token (WBTC) which holds the same value as the underlying collateral.

The DeFi movement can encompass a range of other tokenized assets. Given the open and permissionless nature of DeFi, tokenized real estate allows any prospective investor to participate in the residential and commercial real estate market. Investors could own a single ERC-20 token representing ownership in the underlying property and receive daily rent payments in the form of a stablecoin."

Well known projects are:

DeFi Derivatives

"In traditional finance, a derivative represents a contract where the value is derived from an agreement based on the performance of an underlying asset. There are four main types of derivative contracts: futures, forwards, options, and swaps. With the advent of DeFi, investors can now benefit from open, transparent and automated settlements for derivative contracts. Smart contracts can issue tokenized derivative contracts allowing investors to employ derivative trading strategies for crypto assets and gain exposure to both sides of the asset’s performance.

As you can imagine, being able to “program value” creates endless opportunities for developers. Another perfect example is algorithmically managed assets. With DeFi, users can hold a single ERC-20 token to represent a diversified portfolio fully backed by the underlying crypto assets. Most importantly, all of these tokens operate in a completely permissionless and open fashion naturally embedded in the DeFi movement."

Well known projects are:

DeFi Infrastructure

"In order for any ecosystem to be successful, it’s crucial that an underlying suite of tools and infrastructure exists for users to conveniently interact with their favorite products. DeFi is no different. Infrastructure creates ease and accessibility for users when interacting with new applications or protocols. This can be seen through better non-custodial wallets, such as smart contract wallets, or creating seamless mechanisms for transferring loans across platforms to earn the best rates.

Unlike traditional wallets, DeFi infrastructure commonly includes a number of feature sets to allow different loans, assets and derivatives to be tracked and managed from a secure source. Best of all, it goes without saying that custody and access is restricted to each individual user, with the risk of loss and theft largely obfuscated due to the implementation of smart backups, spending limits and account recovery."

Well known projects are:

DeFi Insurance

"Since the inception of crypto, we’ve seen numerous instances of users losing funds whether it be through exchange hacks, compromised private keys, or simply mishandling their crypto funds. For the most part, given the decentralized nature of the technology, there is no credit card company or bank to call up to reverse the transaction or to retrieve the funds. Therefore, the importance of insurance in the DeFi movement is crucial for bridging this growing need.

Decentralized insurance protocols allows users to take out insurance policies on smart contracts, funds, or any other digital asset through pooling individual funds to cover any claims. This area of the DeFi sector is rather small but we’ll begin to see more and more insurance application arise as the need continues to grow."

Well known projects are:

Stablecoins

"With the large majority of digital assets being subject to extreme price volatility, everyday use-cases surrounding mediums of exchange can be difficult to implement. As such, the recent emergence of stablecoins provide a solid foundation to mitigate price volatility while leveraging the inherent value digital assets provide.

Unlike traditional fiat currencies, stablecoin issuance is fully transparent with reputable projects being fully collateralized and in some cases, completely trustless.

In short, stablecoins are pegged to a predetermined value (most commonly $1USD) with different collaterlization systems in place to ensure that the asset always maintains its peg price. As it relates to DeFi, two currencies have emerged as the standard stablecoins of choice: USDC and DAI"

Well known projects are:

Projects working on DeFi

DeFi project list from DeFi Pulse:

  • Ampleforth - a digital-asset-protocol for smart commodity-money.
  • Augmint - a smart contract platform that issues stable tokens targeted 1:1 to the EUR backed by collateral
  • Augur - a decentralized oracle and peer-to-peer protocol for prediction markets on Ethereum that lets anyone create a market around the outcome of any real-world event
  • Bancor - a protocol on Ethereum for non-custodial token exchange using pooled liquidity.
  • Betoken - An open crypto fund managed by code and meritocracy
  • bZx - a decentralized protocol that enables lending and borrowing for margin trading
  • Compound - an open-source money market protocol on Ethereum that lets users lend or borrow assets against collateral
  • Connext - a non-custodial layer 2 payment-channel technology that enables off-chain, instant payments with low (or zero) transaction costs, helping scale the Ethereum network and paving the way for use cases like micropayments
  • Dharma - a peer-to-peer marketplace on Ethereum for non-custodial lending and borrowing of cryptocurrencies built on an extensible open source protocol
  • DutchX - a fully decentralized trading protocol that allows anyone to add any trading token pair
  • dYdX - a non-custodial trading platform on Ethereum geared toward experienced traders
  • ETHLend (by Aave) - a P2P lending platform for fixed duration loans
  • Helena - a smart contract platform with gamified prediction markets
  • KyberSwap - an on-chain liquidity protocol that lets users perform swaps with liquidity from token holder reserves
  • Lightning Network - a Layer 2 protocol on top of Bitcoin that seeks to improve scalability by moving small and frequent transactions off-chain, allowing for fast peer-to-peer transactions and low fees.
  • Local Ethereum - a non - custodial peer-to-peer ETH marketplace featuring end to end encryption and on -chain escrow.
  • Loom Network - a DPOS layer 2 scaling solution that allows developers to run large-scale applications on top of Ethereum
  • Loopring - an open source protocol for decentralized exchanges designed to provide matching-as-a-service, and its orders are unidirectional and do not differentiate takers and makers giving complete control to traders
  • Maker - a decentralized credit platform on Ethereum that supports Dai, a stablecoin whose value is pegged to USD and backed in ETH
  • Market Protocol - a protocol on Ethereum which offers tokenized leverage trading of anything asset through synthetic pricing
  • Melon - an open-source, community-run protocol for asset management on Ethereum. Melon lets users create, manage, and invest in decentralized funds composed of ETH and ERC20s
  • MerkleX - a decentralized exchange that uses a decentralized clearing network. Merklex allows traders to set limits on what can happen to their funds.
  • Monolith - a decentralised banking alternative, powered by Ethereum.
  • Neutral - a meta-stablecoin system built using a basket of multiple stablecoins to generate a lower volatility token with a reduced risk profile
  • Nexus Mutual - a decentralized insurance platform where people can share risk particularly against smart contract bugs, failure or other black swan events
  • Nitrogen Network - a decentralized P2P network for secured loans
  • Nuo Network - a non-custodial platform on Ethereum that provides a decentralized debt marketplace. Users can lend, borrow, or margin trade any supported cryptoasset
  • Ren - a provider of inter-blockchain liquidity for all decentralized applications
  • Request Network - an open network for transaction requests. It allows anyone to create, store and access invoices and receipts in a universal, decentralized network.
  • Set Protocol - a protocol designed to create, manage, and obtain baskets of tokenized assets
  • Synthetix - a decentralized platform on Ethereum for the creation of Synths: on-chain synthetic assets that track the value of real-world assets
  • Totle - a decentralized liquidity provider where you can swap and transfer tokens while automatically getting the best prices from decentralized exchanges
  • UMA - a decentralized protocol to enable the creation, maintenance, and settlement of financial contracts for any underlying asset
  • Uniswap - a fully decentralized on-chain protocol for token exchanges on Ethereum that uses liquidity pools instead of order books
  • USDx - USDx is a decentralized and synthetic indexed stablecoin introduced by dForce. USDx's initial underlying portfolios include USDC, TUSD, PAX and DAI
  • WBTC - an ERC20 token that is backed 1:1 by bitcoin.
  • xDai - an Ethereum sidechain with 5-second block times, low gas prices, and a native token that’s also called xDai.
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