What is DeFi?
Decentralized Finance (or DeFi) is an emerging category of financial applications that are being developed on top of trustless networks. Today, most of this innovation is happening on the Ethereum blockchain. An entire digital finance stack came into existence within the past 18 months, under the radar of most people.
DeFi is an abbreviation of the phrase decentralized finance which generally refers to the digital assets and financial smart contracts, protocols, and decentralized applications (DApps) built on Ethereum. In simpler terms, it’s financial software built on the blockchain that can be pieced together like Money Legos.
Decentralized Finance (DeFi) is an emerging category of financial applications that are being developed on top of open, trustless networks. DeFi aims to give anyone with an internet connection access to world-class financial services.
Most of this innovation is happening on the Ethereum blockchain. Ethereum is a smart contract platform that enables anyone to programmatically control digital value. You can think of it as the printing press for open finance applications.
Like how the internet created tools for content creators, Ethereum is doing the same by enabling the creation of new financial services.
Within a short period of time, an alternative digital finance stack has emerged on Ethereum, seemingly out of nowhere. Anyone with an internet connection and a crypto wallet can now access a plethora of financial services such as:
- Decentralized Exchanges to help you trade between tokens,
- Decentralized Stablecoins to remove volatility,
- Decentralized Money Markets that enable lending and borrowing,
- Decentralized Synthetics democratizes access to financial products, and
- Decentralized Insurance to help counter black swan events.
These services are all live today. Decentralized Finance is undergoing rapid growth and development. The liquidity of the DeFi ecosystem has been growing steadily, spearheaded by stablecoins and money markets. Its current market size is over half a billion USD.
The pace of innovation in the DeFi ecosystem is incredible, due to the permissionless composability of smart contracts. Unlike platforms that can shut you down at anytime, smart contracts allow anyone to build without needing to ask for permission. We’ll continue to see novel products and services emerging from this space.
The programmable and composable nature of the decentralized financial stack built on Ethereum provides the foundation for a new financial economy. While there are still significant challenges and uncertainty surrounding this financial revolution, DeFi has the potential to bring the rest of the world into the fold with truly open finance.
How do we calculate total value locked (TVL)?
DeFi Pulse monitors each protocol’s underlying smart contracts on the Ethereum blockchain. Every hour, they refresh our charts by pulling the total balance of Ether (ETH) and ERC-20 tokens held by these smart contracts. TVL(USD) is calculated by taking these balances and multiplying them by their price in USD.
How do I get involved in DeFi?
Decentralized finance is open for anyone to take part in. You can start by exploring the resources found on DeFiPulse’s The DeFi List. And if you’re looking to dive head first into the world of DeFi, they’ve written a beginner’s guide called Zero to DeFi. It will teach you the basics guiding you through how to start earning passive income via DeFi lending services.