Decentralized Finance, a Subset of Blockchain
Decentralized Finance is a subset of blockchain industry that attempts to replicate existing financial services while replacing traditional intermediaries with a decentralized network as the root of trust. Although very early in its evolution, decentralized finance presents both threats and opportunities for financial institutions.
Quick Take
- Decentralized finance (DeFi) is the application of blockchain infrastructure to service such as saving, lending, trading, and financial derivatives.
- Prominent projects including MakerDAO, Compound Finance and Uniswap.
- Benefits include programmability, transparency, and the ability to turn a public blockchain network into an open platform for financial and banking services.
- Challenges include complexity, lack of liquidity and technical risk.
- DiFi has the potential to eventually disrupt financial services and banking, but for now is a place of experimentation.
What is Decentralized Finance?
Decentralized finance (DeFi) is the application of blockchain infrastructure to services such as saving, lending, trading, and financial derivatives. By using the internet smart contract and token functionalities of the Ethereum blockchain, services such as MarketDAO, Compound Finance, and Uniswap allow users around the world to interact with each other in sophisticated financial transactions on the same platform. At the heart of this ecosystem is MarketDAO, a credit creation and stablecoin facility that allows users to post existing digital assets as collateral and to borrow a U.S. dollar (USD)-pegged stablecoin.
Why is Decentralized Finance Important?
Replacing traditional intermediaries with a distributed ledger could produce disruption in the long run. Centralized entities such as banks and exchanges are vital to the global economy, because they provide trust, scale, and convenience to clients all over the world. Distributed Ledger Technology (DLT) in the form of public platforms such as Bitcoin and Ethereum could theoretically provide a new trust framework, one that connect users directly. Applied to financial service, this approach alerts…
