DeFi — An Introduction

Total Value Locked (USD) in DeFi (Source: defipulse.com)

Fundamentals

Distinguishing Characteristics

DeFi Building Blocks

  • Not managed by an institution and its employees — instead, the rules are written in code (smart-contract)
  • Code is transparent on the blockchain for anyone to audit, and thus build a different kind of trust with users
  • Transactions are pseudonymous, and transaction activity is public to view
  • DApps are global and available to anyone with an internet connection
  • Permissionless to create, permissionless to participate
  • Flexible user experience — smart contracts are like an open API that anyone can build an app for
  • Applications can be composed by combining other DeFi products like lego pieces

Service Categories

Lending

DEXes

Derivatives

Payments

Assets

DeFi v/s Traditional Finance

  • There’s a premium to financial services because intermediatory institutions need their cut
  • Some people aren’t granted access to use financial services
  • Hidden charge of financial services is your personal data
  • Centralized institutions can close down markets at will

Risks

Category

  • Market risk
  • Counterparty risk
  • Liquidity risk
  • Transaction risk
  • Smart contract risk
  • Miner risk
  • Oracle risk
  • Software bugs in DApps
  • Routine maintenance and upgrades
  • Forks
  • Key management
  • Governance mechanisms
  • Redress of disputes
  • Financial crime
  • Fraud and market manipulation
  • Regulatory arbitrage
  • Dynamic interactions
  • Flash crashes or price cascades

Future Direction

Conclusion

References

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Accomplished Enterprise Architect with proven successes driving Innovation and Digital Strategy for organizations, especially FSI.

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Pankaj Arora

Pankaj Arora

Accomplished Enterprise Architect with proven successes driving Innovation and Digital Strategy for organizations, especially FSI.

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