DEFI DECENTRALIZED FINANCE TECH: WHAT TO KNOW

Decentralized finance, or DeFi, refers to the shift towards building modern financial services on top of blockchain networks like Ethereum instead of going through traditional banks and institutions. By encoding transactions, lending, trading and other activities in open source software and smart contracts, DeFi applications aim to be more transparent, permissionless, and resistant to censorship. A few major categories fueling adoption of this emerging fintech paradigm are below.

Decentralized Exchanges (DEXs)
A variety of DEXs like Uniswap allow direct peer-to-peer cryptocurrency trading without relying on centralized exchange platforms that custody user funds. Liquidity pools and automated market makers enable decentralized swapping of tokens. Various DEXs don’t require identity verification and are largely uncensorable.

Lending & Borrowing Platforms
DeFi lending/borrowing dApps like Aave, Compound, and MakerDAO allow crypto holders to lend out their assets to earn interest or obtain loans using their coins as collateral. There’s no intermediary, enabling code-enforced automation of loan origination, liquidations, and interest payments.

Asset Management & Derivatives
Robo-advisors like Enzyme allow customizable actively-managed crypto fund strategies without fund managers taking custody of assets. Platforms like Synthetix enable creation of on-chain synthetic assets that track real-world currencies, commodities, and derivatives.

Stablecoins
Price-stable cryptocurrencies like DAI attempt to peg their value to fiat currencies like USD using blockchain-based centralized or decentralized mechanisms for minting and burning tokens. These less volatile coins facilitate transactions and lending in DeFi apps.

Insurance Platforms
Initiatives like Nexus Mutual and InsurAce create decentralized pools for insuring smart contract risks, staking on DeFi protocols, and obtaining coverage denominated in crypto. Coverage terms are encoded as code instead of paperwork.

Asset Tokenization
Security token platforms let real-world assets like real estate or venture funds be represented and fractionalized as tokens on blockchains. This enables shared ownership and more liquid trading of previously illiquid alternative assets.

Cross-Chain Bridges
As many different blockchains emerge with their own DeFi protocols, bridges like Router facilitate swapping of assets across these siloed chains to enable greater connectivity and composability across the DeFi ecosystem.

While DeFi currently has issues around scalability, user experiences, regulation, and segmentation, it has quickly grown to over $60 billion in total value locked. Proponents see DeFi potentially democratizing finance by disintermediating middlemen and giving users globally more open access to earning yields, obtaining credit, exchanging assets, and automating financial services purely through self-executing blockchain protocols.