DeFi, or decentralized finance, is turning into the most important nascent trend in finance.
The ability to borrow funds, take out loans, deposit funds into a savings account, or trade complex financial products — all that without asking anyone for permission or opening an account anywhere — is quickly gaining traction. The amount of money locked into various DeFi services has recently surpassed $2 billion, according to DeFi Pulse, up from about $1 billion a month ago. But it’s not just about the money — other assets are being sucked into the DeFi ecosystem.
Let’s take a couple steps back. DeFi, which is built on cryptocurrency platforms such as Ethereum and Cosmos, cuts out human middlemen and paperwork, and replaces them with smart contracts. These are computer programs that run on decentralized blockchains, meaning they’re near-impossible to stop or censor. If I borrowed money to someone via a smart contract, the terms built into the contract have to be obliged — no human can (typically) alter that.
Six months ago, I wrote an article describing how simple it has become to invest, loan, and borrow money using freely available DeFi services, in my case a mobile cryptocurrency wallet called Argent.
Since then, however, the number of services in the DeFi space, as well as overall use, have skyrocketed. The simple practice of borrowing a bit of crypto and generating a return seems innocent in comparison to the massive array of opportunities available today.
Tokenization of everything
One advancement that facilitated this change is tokenization. Tokens — essentially cryptocurrencies that run on a parent blockchain, like Ethereum — are smart contracts themselves. Tokens on Ethereum share many properties with Ethereum’s currency, which is called ether or ETH. But they can be created with properties that make them similar to certain financial products and services. The most common example are stablecoins, which are tokens whose value closely tracks the value of a real-world asset, such as a fiat currency. USDC, TUSD and DAI track the dollar. EURS tracks the euro.
In the past year or so, an increasing number of external assets and financial products have been tokenized on Ethereum. Bitcoin, which by itself does not offer complex smart contract capabilities, is a valuable and highly liquid cryptocurrency asset. It is therefore being injected into DeFi by projects which, typically, lock actual bitcoins as collateral and produce Ethereum-based tokens which track the value of real bitcoins. Examples include WBTC and tBTC. Some 15,500 bitcoins are currently locked into BTC services, with a total value of more than $141 million.
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