The financial industry is experiencing a time of structural change which is being brought about by novel types of financial technology (FinTech). One of the most innovative sectors of FinTech is blockchain. Cryptocurrencies and blockchain-based smart contracts are nurturing entirely new financial products and services that can reduce reliance on legacy gatekeepers and traditional finance industry stakeholders. These products and services have grown to collectively become known as decentralized finance (DeFi).
DeFi refers to an ecosystem of FinTech applications built on inherently decentralized blockchain networks. The term DeFi may also refer to the broader movement that strives to develop an open-source, permissionless, and transparent financial ecosystem on the blockchain. DeFi is meant to be available to everyone regardless of financial history, job status, geographical location and so on. It operates without any central authority and users maintain complete control over their assets through the use of decentralized applications (dApps).
Utilizing DeFi protocols does not come without risks. Many of these platforms have come under attack from hackers with losses coming in to the tune of over $3 billion USD in 2022 alone. In addition to security threats, there are also regulatory risks, token risks, impermanent loss risk, technological risk and more. Prospective DeFi users are advised to always proceed with due caution if they are unfamiliar with the workings of DeFi protocols and the risks associated with them.
DeFi protocols typically offer a variety of financial instruments including staking, liquidity provision, borrowing, lending, investing, and derivatives trading. The growth of the industry has been monumental, reaching $100 billion USD in total value locked (TVL) in DeFi projects in 2021, however, when comparing the size of the DeFi industry to the traditional finance industry, it is easy to see that there is still plenty of growth potential in DeFi.
If you are interested in taking a deeper dive into the mechanics of DeFi, click here to go directly to our Decentralized Finance course (coming soon). Otherwise, continue on to learn the basics of another major blockchain sector, NFTs.