Decentralized finance, or DeFi, is the ecosystem of financial applications being built with blockchain technology. Essentially, DeFi is bringing conventional financial tools from CeFi (traditional centralized finance) on a blockchain. These DeFi tools are mostly built on open-source protocols or modular frameworks and SCPs (Smart Contract Platforms), such as Ethereum, Polkadot, Cosmos and etc. DeFi, being decentralized, is able to take advantages of operating on a public blockchain, such as censorship-resistance and unlimited access to on-chain financial infrastructure.
Decentralized Finance is non custodial (platforms don’t have custody of your assets — you do), composable (open-source code enables developers ability to build on top of others’ applications), open (defi networks are global, there are no borders in this financial system), transparent (the code for DeFi applications is open for anyone to see and inspect)
DeFi has seen a 2000% growth in total amount of money participating in decentralized financial infrastructure over the last year. In September 2019 TVL (Total Value Locked) in DeFi was about 550 million USD. September 2020 marks new highs of 11 billion USD locked. This is 20x growth over the year.
So, what exactly are some of the primary DeFi sectors that are growing right now? Let’s look at some of the most popular — yield farming and decentralized lending protocols.
Yield farming is putting crypto assets to work and generating the most returns possible on those assets. A yield farmer (person participating in farming techniques within DeFi ecosystem) might move assets around within various DeFi projects offering returns (such as Compound, Synthetix, Uniswap, Yearn and so on) constantly chasing whichever pool and opportunity is offering the best APY (annual percentage yield) week to week or even day-to-day.
What makes yield farming gains so special are tokenized incentives. Tokenized incentive is when a new or existing DeFi project incentivizes user activity and proposes any yield farmer their own token in addition to the usual APY return. Incentivized yield farming rapidly grown in popularity and TVL in 2020, offering farmers implied yearly returns in thousands percentages for participating in risky DeFi pools. The market has normalized since then as of late 2020 with less risky projects in the space.
- Defiqa Components