Decentralized finance, or “DeFi,” refers to the growing ecosystem of financial protocols built on blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols that are changing the way we think about financial infrastructure. By deploying immutable smart contracts on blockchains, DeFi developers have created a parallel financial system that runs on decentralized infrastructure, offering anyone with an Internet connection access to a world of open finance.
Early days of DeFi
The first wave of DeFi protocols began to emerge in early 2017, with the launch of MakerDAO’s Dai stablecoin and the Ethereum-based Augur prediction market. These protocols were followed by a number of other lending and borrowing platforms, including Compound, dYdX, and Fulcrum.
These early protocols laid the foundation for the DeFi ecosystem by demonstrating the viability of decentralized financial applications on Ethereum. However, it wasn’t until the launch of MakerDAO’s Dai stablecoin in December 2017 that the true potential of DeFi began to be realized.
Dai is a decentralized stablecoin that is pegged to the US dollar. Dai is created through a process called “collateralized debt position” (CDP), which allows users to lock up collateral in return for a loan in Dai. The value of the Dai loan is calculated based on the value of the collateral, which is typically ETH. The launch of Dai marked a turning point for the DeFi ecosystem, as it showed that it was possible to create a decentralized stablecoin that could be used in a variety of different protocols. In the months that followed, a number of new protocols were launched that integrated Dai, including MakerDAO’s lending platform and the Compound lending protocol.
The rise of Integrated DeFi Protocols
The launch of Dai was followed by a wave of new protocols that began to integrate with each other to form complex ecosystems. In 2018, the MakerDAO protocol was integrated with the Compound protocol to create the first “lending pool” that allowed users to earn interest on their Dai and ETH holdings. This was followed by the launch of the Synthetix protocol, which integrated with MakerDAO and Compound to create a decentralized exchange that allowed users to trade a variety of synthetic assets. The Synthetix protocol was then integrated with the Kyber Network protocol to create a decentralized exchange that allowed users to trade synthetic assets for a variety of different cryptocurrencies.
The growth of DeFi protocols has been accompanied by the launch of a number of new projects and the creation of numerous integrated ecosystems. In 2019, the MakerDAO protocol was integrated with the Compound protocol to create the first “lending pool” that allowed users to earn interest on their Dai and ETH holdings. In the last three years, the DeFi ecosystem has grown exponentially, with the total value locked across all DeFi protocols increasing to over $230 billion in Apr 2022.
Disclaimer: Cryptocurrency investment is subject to high market risk. The statements made in this article are for educational purposes only and should not be considered financial advice or an investment recommendation.
