Toe-Dipping In DeFi: On Purpose, Protocols, Performance & Problems
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Decentralized Finance, or DeFi, is a (not so) new development in the crypto world, and if you’re reading this, you’re probably wondering about it.
Simply put, you want to understand just what the heck it is.
Hopefully this toe-dipping guide helps.
*** You won’t find any investment advice here, however.***
The goal of this post is to attempt (!) to answer the following questions (for you and for me) so as to educate ourselves about the wonderful (?) world of decentralized finance:
- What is DeFi?
- What’s the purpose of DeFi? (different from the first question)
- What’s one interesting protocol in the DeFi space? (waitwaitwaitwaitwait: what’s a protocol? — :) — OK no worries I’ll address this one, too)
- What’s the best performing DeFi project to-date?
- What are some of the biggest problems that DeFi faces?
One more thing before we dip: This is really gonna be a toe-dip, and at the end of this post you’ll find some links you can explore to learn more. Cool?
Cool.
Now, here are my 2-sentence toe-dips, to make an attempt at answering the 5 questions above. This may be especially useful for my fellow 20-tabs-open-on-the-regular busy people who don’t have time to read long posts.
OK. Here we go.
What is DeFi?
DeFi doesn’t really have a strict definition, and is still evolving, however, here’s what I’d say: it’s an over-arching term for describing decentralized financial applications leveraging blockchain technology — namely immutable smart contracts — so that anyone with an Internet connection can participate — and potentially, profit — in a world full of automated financial services, without the need for big institutions or intermediaries. It’s peer-to-peer infrastructure for things like lending, borrowing, trading, (yield) farming and beyond.
What’s the purpose of DeFi?
People around the world are (read: have been) fed…up with the inefficient, unequitable, and non-trickling-down realities of traditional banking & finance, and developers are using platforms like Ethereum, Cosmos and more to replicate — or redo — traditional systems entirely. It seems that folks around the world want complete control over their assets, and the management of these assets.
What’s one interesting protocol in the DeFi space?
A protocol is a foundational layer of code that determines the way a blockchain functions, and in the world of DeFi, projects such as Aave bring together features like algorithmically-determined interest rates for borrowers and lenders “meeting” via lending pools (these pools are the core of the Aave protocol), liquidation thresholds which are reached if a borrower becomes undercollateralized at any point (each borrow position has its own health factor) which, if a borrower does become undercollateralized, triggers a liquidation bonus for individuals able — and willing — to serve as liquidators, and also on-chain governance at two different levels, for smart contract updates and pool-specific parameters, respectively, so as to provide users with an effective and decentralized path for borrowing and lending. DeFi protocols are disrupting centralized banking & finance status quos in much the same way the Bitcoin protocol does, and Aave “flash loans” have become quite popular in the crypto space.
What’s the best performing DeFi project to-date?
According to DeFi Pulse, and with a focus on how much value is stored within DeFi protocols as the sole metric, the best-DeFi-performer as of today is Uniswap, which holds more than 22% (a bit more than $2 Billion USD) of the more than $12 Billion USD “locked” within DeFi. At the end of July of this year, there was just a bit more than $100 Million USD locked in Uniswap (just for a bit of perspective).
What are some of the biggest problems that DeFi faces?
Price mechanism failures, lack of “flash” loan protections, smart contract vulnerabilities which can lead to reentrancy attacks which can lead to crypto theft (and indeed, has), user errors which can have huge consequences and cause their money to be irreversibly lost, and the overall lack of reliable “regulation” are some of the problems present within the DeFi ecosystem. Getting on-chain governance and true decentralization design right is tough, and leaving out the traditional governing bodies in the process is perhaps also one of DeFi’s problems, but perhaps these are good problems to have, as they are evidence of global interest in a new way to do money.
OK! Hopefully this toe-dip has been refreshing and valuable.
Ready to put your feet in? Or just jump in completely?
Start with DeFi Prime.
Or, cannonball into the links below. Happy swimming. But be careful!
