What is Decentralized Finance (DeFi)?
According to Fabian Schär of the St. Louis Federal Reserve, decentralized finance (DeFi) "refers to an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms... It replicates existing financial services in a more open and transparent way. In particular, DeFi does not rely on intermediaries and centralized institutions. Instead, it is based on open protocols and decentralized applications (DApps). Agreements are enforced by code, transactions are executed in a secure and verifiable way, and legitimate state changes persist on a public blockchain. Thus, this architecture can create an immutable and highly interoperable financial system with unprecedented transparency, equal access rights, and little need for custodians, central clearing houses, or escrow services, as most of these roles can be assumed by 'smart contracts.'"
Applications such as decentralized exchanges, debt markets, insurance protocols, synthetic assets, stablecoins, and more are at this very moment, around the clock, powering an alternate, completely autonomous, decentralized financial system with incredibly disruptive and empowering properties.
There are several advantages to using DeFi protocols over the legacy financial system including:
- Cost Reduction: Replacing middlemen with self executing code reduces costs to a fraction of legacy services.
- Accessibility: Anyone with an internet connection can participate 24-7-365.
- Openness: Anyone can build on, access, or provision liquidity to DeFi systems.
- Self-custodial: Users custody and control their assets at all times.
- Speed: Instant execution, settlement, delivery anywhere in the world.
- User-ownership: Users provide self-custodial services that benefit fellow users of the protocol, capturing fees typically awarded to financial institutions.
- Automation: Execution, settlement, and delivery happen automatically via smart contracts without intermediaries or middlemen.
- Composability: Applications can be combined to form a far superior structure.
DeFi Market Study
What was once a sort of sci-fi experiment has developed into a global financial force powering trillions of dollars of productive economic activity quarterly.
DeFi Data (in USD)
Ethereum Transaction Volume
- Q1 2021: $1.5T
- PayPal 2020 Total: $936B
Decentralized Exchanges Monthly Volume Growth
- January 2019 to January 2021: $40M to $64B
- June 2019 to June 2021: $2.6B USD to $111B
- Fabian Schär, "Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets," Federal Reserve Bank of St. Louis Review, Second Quarter 2021, pp. 153-74. https://doi.org/10.20955/r.103.153-74
- Dune Analytics. https://duneanalytics.com/hagaetc/dex-metrics, accessed June 3rd, 2021
- Coingecko. https://www.coingecko.com/en/stablecoins, accessed June 3rd, 2021