Introduction to Decentralized Finance (DeFi)

Welcome to the beginning of our research series on DeFi! We hope you will come to understand the world of decentralized finance more after reading this report.

Welcome to the beginning of our research series on DeFi! We hope you will come to understand the world of decentralized finance more after reading this report.

Key Takeaways

Decentralized finance, or DeFi, refers to financial services, including lending, exchanges, investment, stablecoins, and more, that are built on public blockchains and smart contracts, most commonly Ethereum;

The main benefits of DeFi is that financial services become trustless, censorship resistant, permissionless, and open source. DeFi can in theory make platforms more secure, more resistant to manipulation, accessible for anyone, and transparent;

Although most DeFi protocols have achieved a high degree of architectural decentralization, full political decentralization is hard to achieve. As such, most protocols are still partially centrally governed by central developer teams or foundations;

The most popular use of DeFi is for borrowing and lending, allowing users to put their crypto assets to work to earn interest;

DeFi’s main drawback is smart contract risk, where an attacker could exploit vulnerabilities in smart contracts to steal user funds. However, we believe any attack presents an opportunity for DeFi to mature and improve security practices;

Other drawbacks of DeFi are that it is limited by blockchain throughput and that there could be regulatory oversight on the horizon since it currently operates in a regulatory gray area. Improvements in these areas could help DeFi grow further

Read the full PDF version of the Introduction to Decentralized Finance (DeFi) here.