eFi is shorthand for “decentralized finance,” a way of conducting financial business utilizing peer-to-peer networks, blockchains, and other developing technologies to eliminate intermediaries and central oversight. In a traditional financial system, banks and various third parties like credit card companies facilitate essentially every step of the movement of money from one person to another.

DeFi aims to allow for these transfers to occur in a secure way but without the scrutiny—and the costs, privacy concerns, and occasional delays—associated with these third parties.

Tools of DeFi

DeFi has emerged as a focal point among cryptocurrency enthusiasts as the Ethereum network and its powerful smart contract capabilities have developed. Proponents of DeFi utilize various systems to lend, borrow, and trade cryptocurrencies. These include individual tokens—and particularly stablecoins—as well as exchanges, networks, and decentralized apps.

DeFi Protocols

One reason Ethereum and smart contracts have been crucial to the development of DeFi is because of protocols. DeFi protocols are simply codes, procedures, and rules which govern the systems utilized in DeFi. Through DeFi protocols, participants in the ecosystem are able to trade, lend, stake tokens, and much more. These protocols must be accessible to all wallets so that anyone participating in the DeFi system can follow the same set of rules.

By and large, DeFi protocols are autonomous programs encoded into smart contracts either on Ethereum or a similar blockchain ecosystem. Most protocols attempt to identify and improve upon one or more traditional financial processes. As an example, a DeFi protocol could aggregate data from various decentralized crypto exchanges in an effort to consolidate trading and liquidity pools in order to make transacting more straightforward for users.

Understandably, many DeFi protocols use highly complex procedures in an effort to simplify and increase accessibility. When comparing different protocols, one metric that may be helpful is total value locked (TVL). TVL refers to the total underlying supply of tokens that is being secured by a specific application. 

The largest DeFi protocol as of mid-2022 by TVL is MakerDAO, with a TVL of over $7.5 billion as of June of that year. This protocol enables users to borrow and lend crypto tokens. Users lock their own crypto assets in exchange for tokens of a stablecoin called DAI. Participants can lend and borrow, while the MakerDAO protocol uses smart contracts to liquidate loans and sell the collateral to support the stability of DAI.

An astonishing thing about DeFi protocols is how wide-ranging they are. There are protocols allowing users to move assets from one blockchain network to another, swap various pegged assets, create their own liquidity pools, take and offer loans, and much more. DeFi protocols even allow users to put money away into savings account alternatives or to take on riskier, advanced investments like derivatives.

What do you think about these DeFi protocols in the market? Drop your comments by sharing this article online. 

*Disclaimer: This is not financial advice. The views, thoughts, and opinions expressed here do not necessarily reflect or represent the views and opinions of Defi Decomplicated.*


Mar 6, 2023
Digital Lifestyle

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