What is DeFi?
4 Types of Decentralized Finance Projects Making Waves
DeFi (decentralized finance) uses decentralized networks to turn old financial products into transparent protocols that run without need of a third-party service provider (such as a bank). In short, it’s a type of financial software built on the blockchain, allowing it to be put together piece by piece.
Cryptocurrency itself can be considered a DeFi application, but it’s more than that. It includes tokens, stablecoins (crypto-backed, not fiat-backed), and even exchanges, lending services and prediction markets. The majority of DeFi projects are built on the Ethereum platform, and that seems to be creating a bull run for cryptocurrency. Currently $4 billion is locked in DeFi applications.
Open Banking vs. Decentralized Finance
You might have heard of open banking and been wondering if it’s the same thing. While they’re related, open banking lets financial service providers access data through Application Programming Interfaces (APIs). An API is a piece of computer code that allows two apps to talk to each other, and you likely experience them almost every day, from payment processors to travel booking websites.
Letting two programs share information is great. But DeFi, on the other hand, doesn’t rely on current systems at all — it’s a totally new financial system that’s separate from current infrastructures. (To make matters more confusing, DeFi is sometimes called “open finance” … which, again, is not the same as “open banking.” Yeah, we know!)
DeFi focuses on building open-source financial services that are independent from traditional financial or political systems, with the goal of eliminating censorship and discrimination worldwide. If it gets adopted on a large enough scale, we’d be essentially taking power from centralized organizations — like banks and governments — and putting it in the hands of the people.
Here are four of the most popular types of DeFi projects:
1. Crypto-Backed Stablecoins
Dai and sister coin Sai are two of the few stablecoins that count as DeFi, since they’re pegged to cryptocurrency instead of fiat currency. This makes them global currencies that remain untouched by central banks or governments. While USD-backed stablecoins have some great advantages, they’re basically just IOU notes for the cash sitting in reserve, which isn’t decentralized enough to fall under the DeFi umbrella. Learn more about these and other stablecoins in our free downloadable Ultimate Guide to Digital Currency.
MakerDAO, the creator of Dai and Sai, is extremely dedicated to DeFi. They also have a MKR decentralized governance token that allows holders to vote on Maker Protocol policies, and a collateralized DeFi lending system.
2. Lending Services
Besides MakerDAO, there are a number of DeFi lending services currently battling for dominance. Compound Finance and Aave are the biggest next to Maker, and other contenders include Dharma Lever and Celsius Network.