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Pre-requisite: Basic understanding of blockchains, smart contracts, Bitcoin, and Ethereum.
DISCLOSURE: This is not investment advice. Please do your own research before investing. I am not affiliated, compensated or in any way associated with featured applications in my posts.
What is Decentralized Finance or ‘DeFi’?
DeFi represents a broad category of financial applications that are being developed on top of open, trust-minimized, programmable and censorship resistant networks to improve upon the legacy financial system or create entirely new use-cases.
DeFi vs FinTech:
The internet tremendously improved communication and trade execution speeds but was not able to transform finance at its most critical point: the creation of new instruments.
Ethereum enables anyone to programmatically control digital value through ‘smart contracts’. Smart contracts are essentially computer programs that escrow and then reallocate value based on certain conditions.
These conditions could effectively replicate swaps, options, futures, bonds, or other financial instruments which are executed by and settled on Ethereum’s decentralized network with immutable records.
Why is this important?
What’s interesting is that anyone is able to write smart contracts and create new financial instruments such as money markets, exchanges and asset management solutions.
The internet disinter-mediated traditional media over the last twenty years by providing wealth building tools to content creators. Blockchain technology is doing to finance what the internet did to the media by democratizing the creation of new financial instruments.
So far DeFi’s most popular product has been Maker’s stable-coin, Dai which is backed by collateral loans (aka CDPs — collateralized debt positions). Users lock up Ethereum as collateral in smart contracts in order to generate Dai (up to 66% of locked ETH’s worth). Below is a chart showing recent growth in ETH locked up in Maker’s CDPs:
Source: DeFi Pulse — the analytics & rankings hub for DeFi.
Explore DeFi Directory of popular products: DeFi Directory
Learn how to generate passive income by supplying stable-coins with Compound: Compound Tutorial