DeFi has been around for a few years now but has really taken off since June of 2020. In fact, in the past few months we’ve seen exponential growth in the DeFi space.
It’s the hottest sector in the cryptocurrency market at the moment, just look at how its grown recently.
Featured DeFi Projects
DeFi stands for DEcentralized FInance. In traditional finance individuals need to rely on centralized 3rd parties like banks to coordinate transactions and build financial infrastructure. Because DeFi runs on open source protocols like Ethereum, it is completely decentralized and individuals are able to transact without relying on a 3rd party and participate in building completely open source financial platforms.
A DeFi token is any token used within the DeFi ecosystem or at the core of a decentralized protocol. Many of these tokens, like COMP or UNI, bestow voting rights to token holders allowing them to vote on protocol changes within decentralized protocols. They also may be used to reward liquidity providers within their respective protocols. Others like DAI or WBTC are ERC20 tokens (decentralized stablecoin) locked in the DeFi ecosystem.
Yield farming is the act of depositing crypto assets into lending pools with a high APY (Annual Percentage Yield) in order to generate the highest return. Many of these lending pools exist on protocols like Compound and Aave.
Liquidity mining is the act of receiving a financial reward based on the amount of liquidity provided to a decentralized platform. Some platforms where liquidity mining takes place are Compound and Uniswap.
In DeFi, a bonding curve is a mathematical and dynamic relationship between a token’s price and the supply set into the token’s smart contract. In a bonding curve model, more tokens are issued as demand for a token, and subsequently price, increase. In DeFi BCO’s (Bonding Curve Offerings) have become a popular means of launching a new token without immediately saturating the market.
DeFi is decentralized finance and CeFi is centralized finance. In DeFi participants don’t rely on 3rd parties to coordinate transactions but in CeFi transactions are coordinated by centralized entities.
A DEX is a decentralized exchange and a CEX is a centralized exchange. Decentralized exchanges allow participants to buy, sell, and trade cryptoassets without ever giving control of their assets to a 3rd party. In a CEX the exchange is ultimately holding the assets on behalf of buyers and sellers and coordinating transactions between them. CEXs tend to be much more safe and secure than DEXs. In addition, CEXs, like Bittrex Global, are much more regulated, requiring KYC data on users in order to stay adherent with relevant financial requirements.