Last year DeFi (Decentralized Finance) became one of the most dynamically developing segments of the cryptocurrency market. The total amount of funds blocked in DeFi protocols amounted to about $180 billion. Last year, some DeFi tokens turned out to be extremely profitable, and their owners were able to increase their profits tenfold.

According to analysts of the Chainalysis portal, the monthly volume of DeFi trade transactions amounted to about $80 billion last year. 

The leading countries in the use of DeFi are the USA, China, England, and Vietnam.

What is DeFi

DeFi is an analog of classic financial instruments created in a decentralized architecture. There is also such a definition of DeFi. These are application ecosystems that provide financial services, based on their distribution networks. 

DeFi was first introduced in 2017. Danish programmer Rune Christensen has launched the MakerDAO platform. It is considered the first decentralized credit service. In the same year, the EtherDelta platform was created. Users could exchange tokens on it.

The first DeFi was developed on the basis of the Ethereum blockchain. As the data of the DeFi Llama portal shows, in 2021, seven out of ten DeFi applications operated on the basis of the Ethereum blockchain. Now more and more decentralized applications involve other blockchains, for example:

• Solana
• Binance
• Smart Chain
• Heco.

What is the difference between DeFi and Classical Finance

A standard bank transfer between countries can take 1-2 days, and you will have to pay a large commission for it. The transfer in a decentralized financial application is carried out within a few seconds, the commission is a couple of cents.

Banks have many restrictions for companies and individuals who want to take out loans. Unlike them, a decentralized financial application can be used by any user, he only needs access to the Internet.

Banks have a cumbersome centralized management system that hinders the efficient distribution of funds. The DeFi protocol is fully decentralized, so its ecosystem is flexible and adapts faster to changing market conditions.

Unlike banks, where the client does not know how the profit distribution and management system works, DeFi is completely transparent, since the source codes created on the basis of blockchains are open to any user and audit.

How does DeFi function?

As an example, you can specify the MakerDAO site. The investor invests in the project, he is provided with MKR tokens. Thanks to them, he gets the right to vote when making decisions on further project management. The user who needs a loan transfers ETH to the site as collateral. He is given DAI stable coins.

After the borrower returns the loan, his ETH is transferred back to him. In turn, the DAI tokens are taken by the protocol and burned. The fee paid by the borrower for using the loan is distributed among investors.

Tools implemented in DeFi

In decentralized applications, stablecoins are created and then applied (tokens tied to the price of other assets in a ratio of 1:1. An example of a DAI stablecoin tied to the price of the US dollar.

Credits are implemented in DeFi. The client can issue a loan secured by cryptocurrencies, issue a loan to another user. Loans are issued in stablecoins, and other virtual currencies.

Decentralized finance made it possible for DEX to appear. For trading transactions on decentralized exchanges, there is no mandatory registration, in order to add a new token, you do not need to do a listing. One of the most famous is Uniswap.

DeFi helped to develop the market of forecasts, bets, and lotteries. Thanks to blockchain technology, lotteries and bets are transparent and honest. Users can see how likely this or that scenario is. Augur is considered one of the most famous forecast markets.

With the help of decentralized finance, token-issuing platforms have entered the market. Due to them, developers were able to attract additional funding. An example of such a platform is Aragon.

Payment platforms have been created in DeFi, and cryptocurrencies can be transferred to them almost instantly. This function was implemented by Sablier, Lightning Network.

The most famous DeFi projects

Uniswap

It is designed to exchange various assets on Ethereum. Users can exchange tokens, and provide liquidity to the protocol. Liquidity providers receive rewards from commissions. Users can also create their own liquidity pools.

Maker DAO

The DAI stable coin is implemented on this credit platform. Users can open vaults, and block cryptocurrencies in them as collateral. Clients can borrow stablecoins. MKR token holders are granted the right to participate in protocol management.

Yield Farming in DeFi

Profitable farming is also implemented in decentralized finance. This is the process of acquiring a native token through interaction with the DeFi protocol. The client can receive them for providing liquidity to the landing protocol or decentralized exchange, for participating in voting on the development of the protocol.

What is the risk of using decentralized finance?

There are certain risks of using DeFi. In particular, there is a risk of reducing the value of the original cryptocurrency in the protocol. Volatility may be excessively high, which may affect the work of projects and the ability to generate profit.

Also, loans in DeFi can still be obtained in a small amount, unlike a standard bank loan.

What are the future prospects for the development of DeFi in 2023

According to the cryptocurrency investor and billionaire M. Roszak, the DeFi market may show significant growth over the next year. He believes that a significant increase in global inflation and the desire of investment funds to get high returns will contribute to this. Some foundations such as Grayscale are going to create special development units for DeFi applications such as Aave.    

Most likely, during 2023 and the next few years, DeFi will be able to attract more institutional investors and make regulation more orderly. If decentralized platforms increase scalability, attract more liquidity, then the number of users using them will grow significantly, as will the total trading volumes on DeFi.