Understanding DeFi: The Future of Decentralized Finance

Decentralized finance (DeFi) offers an open, permissionless financial system built on blockchain technology.

### Exploring DeFi: The Future of Finance or Just Hype?
* 🔍 DeFi, or decentralized finance, represents a movement aimed at creating an **open financial system** that eliminates the need for **trusted intermediaries** like banks.
* 🔗 This ecosystem relies on **cryptography, blockchain technology, and smart contracts**, which are the foundational elements of **DeFi applications**.
* 💻 Most DeFi projects are built on Ethereum due to its **robust programming language, Solidity**, which supports the creation of **advanced smart contracts**.
* 🏦 One of the pioneers of DeFi is MakerDAO, established in 2015, which allows users to **lock collateral and generate the stablecoin DAI**, mimicking traditional lending and borrowing systems.
* 📈 Other significant DeFi projects include Compound and Aave, with Compound currently holding around **$630 million in assets**, showcasing the **rapid growth of lending protocols**.
* 💱 Additionally, DeFi encompasses various components such as **stablecoins**, **decentralized exchanges (DEXs)**, **derivatives**, **margin trading**, and **insurance**, each contributing to a **comprehensive financial ecosystem**.
* ⚠ However, risks such as **smart contract bugs** and **systemic vulnerabilities** exist, necessitating **due diligence and potential insurance** for users engaging in this **high-risk, high-reward environment**.
* 🌐 Ultimately, DeFi holds the potential to **disrupt traditional finance** by offering **permissionless, open-source solutions** built on **innovative technologies** rather than outdated systems.

Have you ever heard about DeFi before? Are DeFi apps the ultimate killer apps in the crypto space, or just new hype? No matter if you've never heard about DeFi before or you want to make sure you understand it right, this video is for you. DeFi, or decentralized finance, is a

movement that aims at making a new financial system that is open to everyone and doesn't require trusting intermediaries like banks. To achieve that, DeFi relies heavily on cryptography, blockchain, and smart contracts. Smart contracts are the main building blocks of DeFi. If you don't know what smart

contracts are, or you want to refresh your knowledge, you can pause this video and watch my introduction to smart contracts video first. It's worth noticing that currently, most—if not pretty much all—of the DeFi projects are built on Ethereum. The main reason for this is Ethereum's fairly robust

programming language called Solidity, that allows for writing advanced smart contracts that can contain all the necessary logic for the DeFi applications. Besides that, Ethereum has the most developed ecosystem across all the smart contract platforms, with thousands of developers building new applications every day and the most value locked in

smart contracts, which creates an additional network effect. In fact, all the DeFi protocols mentioned in this video are built on Ethereum. Now let's see how it all started. One of the first projects that started the decentralized finance movement was MakerDAO. MakerDAO, founded in 2015, allows users to lock in

collateral, such as ETH, and generate DAI, a stablecoin that, by using certain incentives, follows the price of the U.S. dollar. DAI can be also used for saving on Maker's Oasis platform. This recreates one of the pillars of the financial system: lending and borrowing. In fact, DeFi is

Trying to create a whole new financial ecosystem in a permissionless and open way. Lending and borrowing is only one part of this ecosystem; some other important parts are stablecoins, decentralized exchanges, derivatives, margin trading, and insurance. Let's talk

about each of these categories one by one. Besides MakerDAO, which we just mentioned, there are a few other important DeFi products in this category. The main one is Compound. Compound, at the time of creating this video, is the biggest DeFi project in the lending category with

around six hundred and thirty million dollars worth of assets locked in the protocol. Compound is an algorithmic, autonomous interest rate protocol that allows users to supply assets like ETH, BAT, ZRX, or Tether and start making interest. Supplied assets can also act as collateral for borrowing other assets.

Another popular DeFi project in this category is Aave. With clever use of smart contracts and certain incentives, we can create a stablecoin that is pegged to the U.S. dollar without having to store dollars in the real world. We already mentioned MakerDAO, that

essentially allows users to lock in their collateral and generate DAI. DAI is a good example of an algorithmic stablecoin. Besides DAI, there are multiple other non-algorithmic stablecoins like USDC, USDT, or PAX. The main problem with them is the fact that they

are centralized, as there is a company behind them that is responsible for holding the equivalent value of the stablecoins in US dollars or other assets. Nevertheless, these stablecoins gained a lot of popularity and are extensively used in DeFi applications like Compound or other decentralized exchanges or

DEXs, in opposition to standard, centralized crypto exchanges, allow for exchanging crypto assets in a completely decentralized and permissionless way without giving up custody of the coins. There are two main types of DEXs: liquidity pool-based and order book-based. A few examples of liquidity pool-based DEXs are Uniswap, Kyber, Balancer, and Bancor/Loopring.

Order book-based DEXs are examples of the order book based ones. Similarly to traditional finance, derivatives are contracts that derive their value from the performance of an underlying asset. The main DeFi application in this space is Synthetix, a decentralized platform that provides on-chain exposure to different assets.

Margin trading, also similar to traditional finance, is the practice of using borrowed funds to increase a position in a certain asset. The main DeFi apps in the margin trading space are dYdX and FTX.

Insurance is yet another part of traditional finance that can be reproduced in decentralized finance. It provides certain guarantees of compensation in return for a payment of a premium. One of the most popular applications of insurance in the DeFi space is protection against smart contract failures and protection of deposits.

The most popular DeFi projects in this space are Nexus Mutual and Opensea. Another really important, although not strictly limited to finance, part of the DeFi ecosystem is oracle services, which focus on delivering reliable data feeds from the outside world into smart contracts.

The most popular project in this space is Chainlink. These are pretty much all the main parts of the DeFi ecosystem. They can also be combined together in multiple various ways; we can think about them as Legos, as more complicated DeFi products can be built.

On top of the existing blocks, let's compare the main differences between DeFi and CeFi, which stand for decentralized or traditional finance. But before we do that, if you've already made it this far, don't forget to smash the like button to help this channel grow. DeFi:

permissionless, no KYC, no sanctions; DeFi open, open-source, encouraging free collaboration. CeFi: closed, closed-source, decisions made behind closed doors. DeFi: censorship-resistant. CeFi: can be censored. DeFi: cheaper (mostly network fees). CeFi:

expensive intermediaries charging hefty fees. DeFi: built on the blockchain. CeFi: built on old foundations. Before we wrap up this video, we have to also mention the potential risks associated with DeFi. One of the main risks are bugs in smart contracts and protocol changes

that can affect existing contracts. We describe them in more detail in the previous video about smart contracts. This is also when users can take additional insurance to lower the risk of potential issues. Besides that, we always have to check how decentralized a DeFi project really is and what is the

shutdown procedure if something goes wrong. Does someone have an admin key that can be used to shut down the protocol? Or maybe there is some untransparent governance in place to make such a decision? On top of that, we have to always account for the more systemic risk that can be

caused by, for example, asset prices sharply losing their value, which may result in a cascade of liquidations across multiple DeFi protocols. Network fees and congestion can also be a problem, especially if you want to avoid liquidations, and we are trying to...

Say, supply more collateral on time. Upcoming Ethereum 2.0 and second-layer scaling solutions can help solve this problem. There is also a set of more subtle features or changes that, applied to one protocol, may incentivize users to certain non-obvious actions

that can cascade across multiple protocols. A good example of something like that would be a recent distribution of COMP tokens in the Compound protocol that caused users to engage in what seemed to be non-profitable, high-interest borrowing that was actually profitable due to being rewarded in the additional COMP tokens. Even though situations like

that can be quite dangerous, they make the whole ecosystem stronger and less vulnerable to similar situations in the future. As you probably already noticed, DeFi is a super interesting and vibrant space that is full of opportunities, although we have to remember that this is still a very nascent industry.

So it's a high-risk, high-reward game. DeFi is the closest thing that can actually disrupt the traditional financial industry. Opposite to most of the same tech companies, DeFi is built on new rails instead of relying on outdated technologies and procedures. Currently, most financial products

can be created only by banks. DeFi is open, permissionless, and enables cooperative work in a similar way to the internet. Although DeFi is currently built predominantly on Ethereum, with more adoption of interoperability protocols, we may see more projects being built on

different chains in the future. This was only an introduction to DeFi. In the following videos, we'll be focusing on each part of the DeFi ecosystem separately, so stay tuned and subscribe to the channel. If you find this video informative, hit the like button and don't forget to subscribe if you're

Interested in DeFi, crypto, and financial technology. Thanks for watching.

What is DEFI? Decentralized Finance Explained (Ethereum, MakerDAO, Compound, Uniswap, Kyber)

Finematics

Introduction to DeFi and its Core Components

Definition of DeFi (Decentralized Finance) and its goal of creating an open financial system without intermediaries.

Explanation of smart contracts as the building blocks of DeFi and their importance.

Ethereum's role in DeFi development due to Solidity and its ecosystem.

MakerDAO as one of the first DeFi projects, enabling collateral locking and DAI stablecoin generation.

DeFi's aim to create a new financial ecosystem encompassing lending, borrowing, stablecoins, exchanges, derivatives, margin trading, and insurance.

Lending and borrowing platforms like Compound and Aave.

Algorithmic stablecoins (e.g., DAI) and centralized stablecoins (e.g., USDC, USDT).

Decentralized exchanges (DEXs) such as Uniswap and others, categorized as liquidity pool-based and order book-based.

Margin trading platforms like dYdX and FTX.

Insurance platforms like Nexus Mutual, providing protection against smart contract failures.

Oracle services like Chainlink, providing reliable data feeds.

Comparison of DeFi and CeFi (Centralized Finance)

Contrasting DeFi's permissionless, open-source nature with CeFi's closed and centralized systems.

Discussion of risks associated with DeFi, including smart contract bugs and protocol changes.

Systemic risks due to asset price volatility and potential cascade liquidations.

Discussion of subtle risks and unintended consequences of certain protocol changes.

Summary of DeFi as a high-risk, high-reward space with significant potential.

DeFi's potential to disrupt the traditional financial industry through open and permissionless systems.

Current Ethereum dominance in DeFi and potential future expansion to other blockchains.

Announcement of future videos focusing on specific DeFi ecosystem components.