DeFi Part 1. Introduction to DeFi

Some subjects are too complex for our short attention spans, so we do 4 posts one week apart, each one short enough not to lose your attention but in aggregate doing justice to the complexity of the subject. Stay tuned by subscribing.

The reason to pay attention to DeFi is  a)  capital is flowing into DeFi  and b) DeFi could disrupt legacy finance, which is a massive opportunity. Starting with capital, during 2020 there was a 10x increase in capital deposited in various decentralized finance networks and VCs (such as Andreessen Horowitz, Bain Capital Ventures and Michael Novogratz) were pumping money into their early stage equity. By January 2021, approximately $20.5 billion was invested in these DeFi networks.

To understand the bigger picture of whether DeFi could disrupt legacy finance, read the bear case in Part 2, Investor Beware says Eeyore and the bull case in Part 3, If it is broke then fix it says Tigger and the moderator’s  conclusion in Part 4, Watch and wait for honey says Pooh Bear

This Part 1 serves as an introduction. If you are new to DeFi this will be useful. If you are deep in the DeFi business you can either skip this introduction or tell our community via a comment where I have got it wrong.

DeFi in 9 bullet points:

  • Short for Decentralized Finance.
  • Uses blockchain platforms such as Ethereum (which saw a rise in developers during 2020, partially due to the increased interest in DeFi).  
  • Transactions are done directly between participants, without any central financial intermediaries such as brokerages, exchanges, banks.
  • Uses smart contracts to execute a transaction between two or more parties.
  • Can be used for the full gamut of financial services – lending/borrowing, trading assets, insuring risk.
  • The most used traction-metric is TVL = Total Value Locked = total amount of assets locked in a DeFi smart contract.
  • Various descriptors are used – DAPP (Decentralised Application), Protocol, Network (we use this last one).
  • You access these networks through Web3 enabled browsers that enable users to interact with Ethereum and other blockchains such as MetaMask.
  • Many networks can be connected in order to “compose” new complex financial services

Leading players today include:

  • Specialist Media = DeFi Pulse. (Mass media coverage has appeared in The Washington Post and Bloomberg and many others).
  • Services and venture incubation = Consensys
  • Pioneering DeFi network = MakerDAO‘s stablecoin-based lending platform

Next week you can read the bear case in Part 2, Investor Beware says Eeyore

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