What is Decentralized Finance (DeFi)?

DeFi is considered one of the fastest growing sectors in the crypto industry and is often referred to as the future of finance.

The acronym DeFi stands for – decentralized finance – and is usually used to describe all applications and companies that offer financial services based on decentralized blockchain technology. You will also come across the term – Open Finance – again and again in the course of your research. However, both mean the same thing.

What’S behind DeFi?

The concept of decentralization contrasts with traditional financial services, which are usually organized centrally, i.e., by a single institution, such as a central bank or financial institution. DeFi can overcome many of the common disadvantages of centralization, such as centralized vulnerabilities, monopoly positions, and bureaucratic obstacles, and would be redundant over time.

In this context, the decentralization of financial services is possible thanks to smart contracts, where computer code automatically enforces the rules and all transaction data is kept in one – distributed ledger. This way, no actor has sole control over transactions, preventing censorship and corruption.

DeFi – Today

DeFi is an incredibly fast-growing sector that is far from reaching its zenith. Several metrics are used to estimate the size and dynamics of the DeFi market. One of them is Total Value Locked (TVL), which indicates how much in assets (in USD or ETH) is locked in the sector. According to DeFiPulse, TVL was an estimated USD 41 billion at the time of my writing, an amount that has grown exponentially in recent months.

At the time of writing, the market capitalization of DeFi coins was estimated at USD 16.5 billion. The largest projects by market capitalization are currently MakerDAO (the decentralized protocol for issuing the USD-linked stablecoin DAI) and Compound (a money market protocol for lending).

The Future of DeFi

Decentralized financial services are undoubtedly a very hot topic in the crypto economy and have been one of the fastest growing sectors ever in the past year. The exponential growth and general hype around DeFi has attracted many new crypto investors and crypto developers, and piqued the interest of traditional financial players. However, the road to widespread adoption is still long. DeFi’s future prospects depend on creating value for users and delivering on the promise of accessible and open services.

At the time of writing, DeFi offers very competitive returns compared to traditional financial markets and other crypto options. For example, lending rates are significantly higher than savings rates offered by most conventional banks. Within the crypto economy, competitive opportunities arise from staking, which allows crypto users to earn regular rewards.