The core of Decentralised Finance

9 Wed, Feb 2022



Decentralised finance opens up financial services to anyone with an internet connection and they’re largely owned and maintained by their users. DeFi is built on transparency, with the system and product data open to anyone, in which users hold their own money and control how it is transacted. Users can transfer funds willingly in minutes and have transaction activity fully pseudonymous, with no fear of a central bank or third party mismanaging or withholding your money and coupling this with your identity. 

At the core of decentralised finance is decentralised applications (dApps). DApps don’t require any central intermediaries to run. DAaps are decentralised products or services that exist and run on the Ethereum blockchain. Here, smart contracts are executed in order to power decentralised applications such as DeFi or nonfungible tokens (NFTs). DApps are like normal apps, but differ in the sense that they are run on a peer-to-peer network (ie Ethereum blockchain), meaning no one person or entity has control of the network. The dApps are open-source and operate on their own without the need of an entity or individual controlling it, with records and all data made readily available to the public, as well as utilising cryptographic tokenomics to help keep the network and blockchain secure. From exchanges, to marketplaces, gaming, gambling, NFTs and now more than ever, DeFi, Ethereum has many of the larger dApps globally built on its blockchain, such as OpenSea, Uniswap, and MetaMask, as well as close to 3,000 total dApps. With the cryptocurrency economy continuing to roar and develop to the point in which you can earn interest, borrow, lend, long, short and more, deFi will continue to grow in importance. 

What are the main DeFi platforms?

The five macro areas of decentralised finance are lending and borrowing, decentralised exchanges, derivatives, management of digital assets, and payments. 

Decentralised borrowing and lending has also become available to cryptocurrency users, with those with large sums of cryptocurrency wanting liquidity in other currencies being able to now borrow money against their cryptocurrency holdings as collateral. DeFi also allows any two users to directly transact without the need for a central intermediary. Moreover, transaction fees are heavily reduced and the users can actually directly negotiate with one another the interest rates, without approval from a third party. Users who lend money via decentralised finance networks usually enjoy much more attractive interest rates than those paid by traditional financial intermediaries. Users have also been able to leverage decentralised finance for the effective management of their savings. The ability to lock assets in lending protocols or ‘staking’ cryptocurrencies have opened the door for individuals or entities to start earning interest. 

Decentralised exchanges allow users to buy, sell and trade their cryptocurrencies without the need of a central intermediary overseeing the transaction. Users who use a decentralised exchange have full control over their respective cryptocurrency holdings rather than having to deposit them in a wallet held by a centralised exchange. Utilising smart contracts to perform the work of centralised exchanges, decentralised exchanges provide pricing for each counterparty at or near prevailing market prices. Decentralised exchanges aim to provide interoperable, trustless, permissionless trading across a wide variety of trading pairs. For instance, PancakeSwap is a Binance Smart Chain based decentr54alised exchange that allows blockchain developers to launch crypto projects, stake their assets, and exchange their tokens. The platform employs automated market-making services for decentralised exchange swapping of BEP-20 tokens. The most popular decentralised exchanges are Uniswap, Tokenblon, 0x Protocol, Venus, Sushiswap, Compound, BurgerSwap, Curve Finance, 1inch Exchange and PancakeSwap.

In traditional finance, a derivative is an arrangement or product whose value derives from and is dependent on the value of an underlying asset, such as a commodity, currency, or security. There are four main types of derivative contracts, being futures, forwards, options and swaps. In decentralised finance, investors can benefit from automated and transparent settlements from derivative contracts. The motives for the development and usage of derivatives in decentralised finance are the same as those traditional financial markets, either to hedge price risk associated with an exposure to a cryptocurrency asset, to exploit a speculative opportunity, or to access leverage. Perpetual Futures, or ‘Perps’ are one of the simplest forms of derivatives traded on decentralised exchanges. 

Management of decentralised digital assets has also grown exponentially with the introduction of DeFi. With the attributes of decentralised exchanges, derivatives, protocols and composability, the foundation of DeFi asset management has grown due to its accessibility, automation and anonymity. As DeFi continues to develop, investors will seemingly need more tools to manage positions across a wide number of sectors. For instance, yield farming has become a popular form of risk management, whereby rewards in the native tokens are received over and above normal yield for providing liquidity to the protocol and thereby offering a kicker in the rate of return. Investors must be weary of risks, with farming yields being highly variable and coming from risky protocols. Furthermore, decentralised self-investing portals such as Robinhood have shifted the control of investment management from central intermediaries to the investor. This has made it easier than ever for an everyday investor to take concentrated positions in specific DeFi projects, with a number of dApps offering different ways to either track, manage or hedge exposure.

Lastly, decentralised finance allows for cryptocurrencies and payments to be universally accessible.  DeFi platforms and protocols are usually automated through the use of smart contracts meaning that these money management systems can be run without the need for human moderation, a bank or third party approving the financial service. Users of decentralised platforms can universally make payments without the need of this central intermediary.