You may have heard the term DeFi and wondered “what the hell is that?” In a world where snappy abbreviations come thick and fast, it can be hard to keep up.
Simply put, DeFi is a blend of two words – ‘decentralized’ and ‘finance.’
But what is decentralized finance and why should you care? Well, it’s a revolutionary concept that will change the world in a profound way. So, you most DeFi-nitely should care.
And while at first glance it may seem a complex topic, DeFi is a straightforward notion that can be explained in easily digestible steps.
So, let’s do exactly that. Let’s give you an idea of the full impact of this pioneering movement that promises to permanently reshape the financial landscape.
What is Decentralized finance?
Think of decentralized finance like a huge financial ecosystem. An endless number of financial systems can be built within this ecosystem, without being controlled by a central figure. Each can remain open to change and modification, can be transparent and traceable, and can give full ownership of assets to their actual owners.
Imagine every financial service available today – from savings and loans to investments and trading deals. Now imagine these services available at the click of a button, with no middleman stealing a slice of the pie, no bureaucracy slowing things down and, crucially, no institution overseeing and controlling everything.
DeFi puts control and ownership of your money back where it belongs. In your hands.
For years, legacy finance has been operating under the assumption that people actually owned their assets. In reality, they were trusted to manage the assets of the population. And just around the time that legacy finance’s abuses of trust were truly brought to light, the potential for an entirely new system emerged.
The divine line "cryptocurrency is for criminals" is a cunning defensive strategy created by the so-called traditional financial services sector - Mohith Agadi
The emergence of blockchain has changed everything. These building blocks are the foundation of an open-source network that enables anyone, anywhere in the world to collaborate. Through these collaborations, ideas can be exchanged and put in place, all within a secure ecosystem, where new financial products can be developed at lightning speed.
DeFi gives a space to innovators to constantly change the financial landscape for the better.
In essence, DeFi aims to be a flexible, efficient, fair and transparent system that allows innovation to flourish and kills corruption at its roots.
Basically a complete 180 degree overhaul of the age-old system that has failed us for too long.
DeFi: taking Fintech to the next level
While the Fintech revolution is changing the world around us – with integrated digital systems tying together our daily lives – DeFi promises to take things further, with a massive shift of power from centralized institutions to the individual.
Fintech is a remarkable movement that has already changed the way we live and will continue to shape our future. But it has its limitations. Companies like PayPal, Stripe and Robin Hood have replaced the rusty old cogs of the system with shiny new state-of-the-art gears that take things to a new level. But it’s still the same old machine, with the same hierarchies and monopolies to success.
Until we change the way financial institutions work on a fundamental level, real change will evade us. But DeFi plans to do just that, by taking power away from centralized finance and putting ownership back into the hands of the people.
A massive redistribution of wealth is on the cards. It includes countries and populations that have been historically excluded from taking part in their own financial betterment. And it’s all built upon three core principles.
Fairness, trust and transparency
There is nothing so stable as change - Bob Dylan
The three key tenets of DeFi – fairness, trust and transparency – are three hugely important, fundamental concepts that have been sadly lacking from traditional finance. DeFi aims to put that right, with an emphasis on giving you complete control of your assets.
Of course, those who fear change the most are those that stand to lose the most. And while traditional financial institutions attempt to offer customers more control of their own finances, the reality is they can’t compete with a completely decentralized system.
With control coming from the fabric of the decentralized network – the mechanisms of the blockchain and the coding itself, instead of from a central authority pulling the strings – DeFi offers an alternative way. But enough talk. Let’s see some numbers.
DeFi in the numbers
DeFi is hard to define as a single concrete thing. As it’s a broad concept, it can be hard to quantify, which means its true impact can be difficult to really pin down.
Let's look at two different ways of measuring the impact of DeFi: amount of collateral locked into DeFi and existing DeFi applications.
1. One way to measure the impact of DeFi is to look at the amount of collateral locked into DeFi applications. Decentralized finance applications (often called Dapps – more on these later) lock up permissionless collateral (basically collateral on the open-source blockchain network) and use this as a barometer for financial moves, like providing liquidity, making loans etc. It’s a useful metric that demonstrates the growth of this disruptive financial system. Within the past three months alone, the total value locked (USD) in DeFi has grown from $630 million to 1.6 billion.
2. Another way to measure the increasing impact of DeFi is the number of DeFi applications that exist. Known as DApps (decentralized finance applications) these ingenious little pieces of software are the vehicles for the concept of DeFi.
What are DApps?
In order to understand DApps, we must first have a brief recap of the foundations on which they’re built.
A decentralized ledger of digital blocks, blockchain is a system of agreed upon truths formed by a huge network of peers. It is self validating and isn’t controlled by a single organization or entity.
Transactions are trackable and transparent. Trust is irrelevant, as the human element – and with it the potential for corruption – is removed.
Blocks haven’t changed the game this much since Lego.
The software that’s built upon these revolutionary little building blocks is available to everyone – this is what makes it ‘open-source.’ And these ingenious pieces of software are known as DApps.
What makes DApps so different is their ability to hook up two complete strangers from other sides of the planet – without a single all-powerful institution to get involved in the deal. It’s completely reshaping the idea of trading, investing and, in general, all financial dealings. Kind of like a return to the days of simple bartering, but built on a digital framework.
So why are DApps so special and what separates them from the traditional financial applications?
What’s so good about DApps?
There’s a reason everyone in crypto is talking about DApps. Here’s the lowdown on why they will eventually make old school financial applications redundant.
DApps aren’t managed by a corporation or institution like traditional financial applications – instead they are integrated into the blockchain, created through code and use smart contracts as a basis. Once the smart contract is set up on the blockchain the DApp becomes self regulating, with little or no human intervention needed. This amounts to a fairer system that transfers ownership to the individual, rather than large organizations.
To see other real life use cases of smart contracts, check our infographic here.
The global reach of DApps is unprecedented. They can be accessed and used by people all over the world, from Texas to Timbuktu and everywhere in between. They are ‘permissionless’, which enables connections to be made that weren’t previously possible, stimulating the growth of emerging industries and developing economies.
DApps lift the veil on financial dealings, giving transparency to a process that has to be open to scrutiny. Traditionally, the intricacies of finance have been hidden from the view of the people it’s supposed to serve, allowing for corruption on a massive scale. With a new standard of transparency and traceability, DApps can be audited by anyone. This puts an unprecedented level of trust into finance.
4. Easy to use and create
The user experience of DApps is on a totally different level to anything that has come before it. These decentralized applications can be designed by anyone and everyone – and the cream rises to the top. So, the best DApps will be the ones that are the easiest to use, with the best user experience. And if you don’t like them… well, hey… make your own!
Completely new DApps can be created by taking existing DApps and combining them for something totally different. So take a stablecoin, mix in a blockchain prediction market, then throw in a DEX (decentralized exchange) for good measure and use a smart contract builder to bind everything together – you’ve got yourself a DApp! Again, think of it like connecting Lego to form a new, unique shape.
DApps are accessible in a way that traditional finance has never been before. They open the door for people from all walks of life to take control of their own money and assets, getting rid of the doormen who always took a cut and banishing the bureaucracy that tied the financial process up in knots. Untangled, streamlined and fair – just like it always should have been.
There’s no doubt that the popularity of DApps is growing at an increasingly rapid rate. In fact, DApps are already making a massive change to the way we interact financially. Let’s take a look at the figures.
DApps in the numbers
Today there are over 3,500 DApps – that’s more than a ten-fold increase in just three years.
Across all DApps, there are over 2.5 million transactions per day. These take place across a multitude of sectors including healthcare, development, games and governance, as well as finance.
The most popular DApp platform is Ethereum, which has 43,000 active daily users, with almost 5,000 smart contracts and a daily transaction volume of nearly $50 million.
So, let’s a look at some of the best DApps around and find out why they’re making their mark in their respective sectors.
Best DApps in 2020
A digital currency wallet and a crypto currency exchange platform, Coinbase is a hugely successful DApp that’s become the world's leading platform for digital currency integration.
Founded in San Francisco, California in 2012, Coinbase brokers exchanges of Bitcoin, Bitcoin Cash, Ethereum (to name just a few) with fiat currencies in around 32 countries, and bitcoin transactions and storage in 190 countries throughout the world.
Coinbase makes cryptocurrency easy to use and has built a trusted name for itself in a space that is built on trust. The Coinbase Wallet is a standalone DApp that gives users ownership of their own crypto by storing all digital assets in one place. It also gives them the chance to experience the open financial system and explore all it has to offer.
A crypto wallet and crypto payment gateway, Metamask is a global community of developers and designers dedicated to making the world a better place with blockchain technology.
Metamask empowers people all around the world to use blockchain, giving them the tools to access this new world of decentralized finance.
The Metamask wallet keeps data and assets safe and sound, acting as a shield that protects users from hackers and data collectors, enabling them to explore the new territory of DeFi safely and securely.
Metamask acts as a gateway to next generation DApps that give control back to the user, taking it away from dishonest central financial powers. They give people ownership of their own assets and give them the ability to make seamless financial moves in an instant.
Instead of a password for every site and every DApp, Metamask creates a secret phrase that controls all accounts – a login, password and proof of ownership rolled into one. This is the key that unlocks and safeguards the DeFi experience for Metamask users.
Bloom is bringing credit to the modern age, with a DApp that acts as a blockchain solution for secure identity and credit scoring. It gives users ownership over their digital identity and financial data, enabling them to take control of their finances before someone else does.
This leading DApp is helping to transform global identity and credit through a decentralized infrastructure that is private, secure, financially inclusive and consumer controlled. It gives users the chance to check their credit anytime, anywhere – and all for free.
ID verification is becoming increasingly important – and Bloom is providing one of the best data and identity authorization services around, enabling businesses to meet AML regulations and helping consumers to create a secure, reusable digital identity.
Sum & Substance
A lightning fast KYC process is a key element of modern DApps. This is where Sum & Substance come in. It’s an all-in-one platform that onboards and verifies customers, making the whole process incredibly easy.
Sum & Substance (Sumsub) works with a wide range of DApps from different sectors, including the p2p marketplace, electronic wallets, online creditors, digital banking and cryptocurrency exchanges to put KYC compliance and AMF at the core of DeFi.
Sumsub works with anti-fraud teams to fight money laundering, terrorist financing and online fraud, providing a verification process that’s designed for speed, ease of use, and common sense. It balances providing privacy and security for consumers with protecting honest companies from the complexity of regulatory language.
A growing team of 100, with offices all over the world, Sumsub is made up of experts in their field – in fact, the company was invited by several regulators and banks to act as a consultant on new AML laws and has delivered a masterclass on KYC/AML.
Uniswap empowers developers, liquidity providers and traders to take part in a financial marketplace that is open and accessible to all. It’s a DApp that provides automated liquidity to thousands of users and hundreds of applications.
In the new age of unrestricted access to financial services, Uniswap removes barriers of entry. It gives people the chance to participate in DeFi and enables everyone and anyone to create new markets, provide liquidity and build DApps that could never have existed in the conditions under the old financial system.
Comprising a small team in Brooklyn, New York, alongside collaborators from all over the world, Uniswap is committed to open source software and building a censorship-resistant financial infrastructure for Ethereum.
Completing the list is yours truly! Raise is a DeFi lending platform that connects investors and borrowers, regardless of where they are in the world. Utilizing smart contracts to create a trustless, transparent agreement, Raise enables investors to put their money into something they care about and then sit back and watch it grow.
Without the centralization of regular finance, investors are free to make real gains on their assets, while avoiding the needless bureaucracy that slows down the old broken models of traditional finance.
Platforms like Raise offer their users something unprecedented. It enables them to make smart investments – with a higher ROI than other secure products – while at the same time contributing to emerging industries in underbanked countries.
Raise is, in essence, a decentralized lending platform that empowers people to change lives – theirs and the lives of others. Something that’s just not possible within an old centralized system that’s fading fast.
Why DeFi is the future
So, clearly it’s much more than a buzzword. Let’s recap and take a look at why DeFi is the future of finance.
Decentralized means fair
No middlemen, no all-powerful entity wrangling a profit out of your money and no hidden agendas. Just you and your assets, within a transparent, traceable system that is ultimately fair.
DeFi values innovation
DeFi incentivizes innovation and gives creatives a space to do what they do best. Within this kind of ecosystem, amazing products will be built that benefit the user above all else.
DeFi is accessible to all
Whether you’re an investor in Iceland or a trader in Tanzania, DeFi gives you the chance to be the master of your own financial future. Although regulations are still in place in certain countries, the barriers of a bygone era are being torn down piece by piece and DeFi is becoming a truly global movement.
DeFi is fast and intuitive
Old, clunky, outdated systems are being replaced by seamlessly designed software, made by enthusiasts, that offer a truly unique user experience.
DeFi is growing fast
We’ve seen the numbers – a ten-fold increase in DApps over a three year period, across industries that include energy, health, media, security, governance, property and finance.
Then there’s the growth in total value locked (USD) in DeFi – over a billion within the last three months alone!
DeFi just needs to capture the wider public’s imagination, as well as their trust. A report by CoinGecko shows that the vast majority of people who have heard of DeFi are males between the ages of 20 and 40. It’s crucial then, that for DeFi to truly fulfil its potential, it has to conceive a wider cross-section of societies on a global scale.
One finding of CoinGecko’s survey was very interesting. When asked if they would be willing to stop relying on banks completely, only 6% of respondents said no.
Perhaps the best indication that banks – along with other old lifeless financial institutions – have had their day. Tomorrow, DeFi will make the world a brighter place.