DeFi is a developing market sector within the intersection of blockchain technologies, digital assets, and financial services. According to DeFi Pulse, the value of digital assets locked into DeFi applications grew 10X from less than $1 billion in 2019, to over $10 billion in 2020, and over $80 billion at its peak thus far in 2021. Yet the DeFi applications and underlying infrastructure are still in its nascent stage of development.
The goal of this report is to provide an introduction of the new emerging area of DeFi infrastructure powering DeFi apps today. While it's easy to get caught up in the hype and speculation within the space, I'll focus on the key components of DeFi applications, their key differentiation compared to traditional finance, potential risks, and longer term implications these DeFi apps are causing.
Major Structural Commonalities Across DeFi Apps
DeFi apps are financial applications with no central counterparties. In practice this means there is no institution (e.g. banks) you are interfacing with to access these financial applications; instead users interface directly with the programs (e.g. smart contracts) on top of the protocol itself. For more of a DeFi 101 primer I highly recommend this report.