What is DeFi and why does it matter?

crypto Apr 5, 2021

Decentralized Finance (“DeFi”), is the idea that traditional financial service offerings such as banks, markets, and other investment services can be recreated or improved upon using applications created on the blockchain. ~DeFI Adoption 2020: A Definitive Guide to Entering the Industry, Cointelegraph Consulting

Much has been made of the rising price of Bitcoin (BTC) and some of the factors in the current macroeconomic environment that may be driving that incredible story. Here at Avicenna, we are following developments in the space very closely, but we also believe that the mainstream attention on Bitcoin masks a much more fundamental shift that is happening around the Ethereum ecosystem, and a broader movement that is commonly referred to as DeFi.

Ethereum can be viewed in many ways. Many already consider ETH, the first digital asset built on the Ethereum blockchain, a credible store of value, similar to BTC, and posit that it is poised for a similar value trajectory:

That said, the drivers behind its value are viewed differently, for good reason - less digital gold than Bitcoin, with some similar characteristics in this respect, but increasingly valuable from the perspective of a platform or protocol that enables value to be created on top of it.  

Interoperability continues to be a challenge on the mainstream internet - despite the fact that over half of the world now has access to it, closed ecosystems exist everywhere.  The Ethereum and broader alternative finance community is creating a set of capabilities that could potentially address this challenge significantly, in real-time and at material scale.  To be clear, there are a number of DeFi protocols, the largest of which is Ethereum, with many others being actively developed.

DeFi would not exist without stablecoins, which are pegged to a fiat currency such as the USD or the Chinese Yuan. Recreating lending contracts and other financial products in a volatile asset is impractical, therefore most DeFi contracts incorporate stablecoins at the core of their functionality.

Common types of stablecoins in the market today include USDT, USDC, and DAI. Examples of DeFi use cases include borrowing and lending (e.g., Compound, Aave, Maker), decentralized exchanges (e.g., Curve, Uniswap, Bancor), and synthetic asset bridges (e.g., BitGo, REN, Keep Network), to name a few.

This vibrant world of DeFi has already emerged, and  represents billions of dollars in daily transaction volume.  Think about that.  Financial ecosystems worth billions of dollars, generating fees, facilitating trade, and backed by… the users themselves. It’s pretty compelling stuff, and some believe that it is the only financial ecosystem that will ultimately matter given the momentum associated with these network effects.

Here's a conversation to listen to next if you'd like to learn more about the Ethereum ecosystem:


Avicenna capital

crypto / fintech / macro research

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