Decentralized Finance (DeFi), is a rapidly growing sector of the cryptocurrency industry, with a current market capitalization of over $57.5 bn as of April 18th, 2023 according to TradingView. Built on top of blockchain technology, DeFi applications are designed to provide a wide range of financial services enabling users in participation in the global financial system regardless of their location or background.
The DeFi stack includes interconnected components that work together, each of which plays a critical role in enabling decentralized finance, such as:
Decentralized Exchanges (DEXs): allow users to trade cryptocurrencies without the need for intermediaries like centralized exchanges. According to CoinMarketCap DEX rankings, the top 5 DEXs by trading volume as of April 2023 are PancakeSwap, Uniswap, Sushiswap, QuickSwap and 1inch Network.
Stablecoins: cryptocurrencies that are pegged to a stable asset like the US dollar. The top stablecoins in terms of market capitalization include Tether.to (USDT), Usdc (USDC). USDT is the largest stablecoin by far, with a market cap of over $81 bln as of April 2023. The stablecoins offer users a variety of benefits, including fast and cheap transactions, easy conversion to other cryptocurrencies, and increased stability.
DeFi Lending Platforms: use smart contracts to automate lending and borrowing processes and allow users to earn interest on their crypto holdings. Aave Companies is currently the largest DeFi lending platform by TVL, with over $8 bln in locked value. Compound is another well-established lending platform with a TVL of over $2 bln. MakerDAO is a unique lending platform that allows users to borrow its stablecoin, DAI, using other cryptocurrencies as collateral.
Insurance Platforms: allow users to purchase decentralized insurance coverage for their cryptocurrency holdings. According to a report by OpenCover, a blockchain-based insurance platform, the DeFi insurance sector paid out a total of $34.4 million in claims in 2022. This figure highlights the growing importance of insurance in the DeFi ecosystem, as more users turn to decentralized insurance platforms to protect their cryptocurrency holdings against various risks such as smart contract bugs, exchange hacks, and other security vulnerabilities.
Oracles: software programs that establish a link between real-world data and blockchain-based smart contracts and agreements, such as market prices or weather data. They act as a vital bridge between on-chain activities and off-chain information and play a critical role in many DeFi applications.
Together, these components form the DeFi stack, a powerful set of tools that are leveraging blockchain technology and transforming the way we think about finance. However, as with any new technology, some challenges must be overcome, including issues of scalability, security, and regulatory compliance.