What is Defi and why is it gaining popularity?

Decentralized finance—often called “DeFi”—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain.

From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Now with over $13 billion worth of value locked in Ethereum smart contracts, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions. Whereas our traditional financial system runs on centralized infrastructure that is managed by central authorities, institutions, and intermediaries, decentralized finance is powered by code that is running on the decentralized infrastructure of the Ethereum blockchain. By deploying immutable smart contracts on Ethereum, DeFi developers can launch financial protocols and platforms that run exactly as programmed and that are available to anyone with an Internet connection. 

The breakthrough of DeFi is that crypto assets can now be put to use in ways not possible with fiat or “real world” assets. Decentralized exchanges, synthetic assets, and flash loans are completely novel applications that can only exist on blockchains. This paradigm shift in financial infrastructure presents a number of advantages with regard to risk, trust, and opportunity. 

From DAOs to synthetic assets, decentralized finance protocols have unlocked a world of new economic activity and opportunity for users across the globe. The comprehensive list of use cases below is proof that DeFi is much more than an emerging ecosystem of projects. Rather, it’s a wholesale and integrated effort to build a parallel financial system on Ethereum that rivals centralized services because it is profoundly more accessible, resilient, and transparent. 

Asset management:

With DeFi protocols, you are the custodian of your own crypto funds. Crypto wallets like MetaMask, Gnosis Safe, and Argent help you easily and securely interact with decentralized applications to do everything from buying, selling, and transferring crypto to earning interest on your digital assets. In the DeFi space, you own your data: MetaMask, for example, stores your seed phrase, passwords, and private keys in an encrypted format locally on your device so that only you have access to your accounts and data. 

Compliance and KYT:

In traditional finance, compliance around anti-money laundering (AML) and countering-the-financing-of-terrorism (CFT) relies on know-your-customer (KYC) guidelines. In the DeFi space, Ethereum’s decentralized infrastructure enables next-generation compliance analysis around the behavior of participating addresses rather than participant identity. These know-your-transaction (KYT) mechanisms help assess risk in real time and protect against fraud and financial crimes. 

DAOs:

A DAO is a decentralized autonomous organization that cooperates according to transparent rules encoded on the Ethereum blockchain, eliminating the need for a centralized, administrative entity. Several popular protocols in the DeFi space, such Maker and Compound, have launched DAOs to fundraise, manage financial operations, and decentralize governance to the community.