DeFi is a collect-all term for decentralised financial services and products. They are constantly evolving and changing due to their building blocks design, composability and versatility.
Here are a few examples of the most popular, but by no means definitive, forms of DeFi:
Decentralised exchanges
A decentralised exchange (DEX) is a platform that facilitates peer-to-peer cryptocurrency trades directly between users without a centralised intermediary. DEXs use blockchain-based smart contracts, bypassing traditional order books for liquidity pools.
Users retain control of their private keys and funds, connecting directly via crypto wallets. This enhances security and transparency while allowing open, permissionless access but can sometimes result in higher transaction fees or price slippage.
Stablecoins
Stablecoins are cryptocurrencies pegged to stable assets like USD, ensuring lower volatility than non-backed cryptocurrencies. They provide an important bridge between traditional finance and the crypto world.
Borrowing and Lending
Borrowing and Lending protocols create lending and borrowing rates for users who wish to either lend out their crypto assets in order to create a passive income or borrow against their crypto assets.
Interest rates are dynamically calculated based on supply and demand for a given asset. Since they are enforced through smart contracts, assets are transparent, payments are automated and users don’t usually need to provide credit scores or identification to take out a loan or lend assets.
Wrapped Coins
Wrapped coins are similar to stablecoins in that they peg their value to a different cryptocurrency to overcome issues of interoperability between different blockchains. Wrapped coins give users the ability to use crypto assets in DeFi protocols that are not available on their native blockchain.
For example, if a user has bitcoin but wants to lend it out via a platform built on Ethereum, Wrapped Bitcoin (WBTC) can be used as a synthetic bitcoin on Ethereum to participate in DeFi protocols. Wrapped Coins are pegged 1:1 with the underlying asset, which is stored in digital vaults.
Prediction markets
Prediction markets pay out participants for correctly predicting future events. This is a broad concept that can apply to sports betting, election results or even the weather on a particular time and day. It can also refer to trading futures and options contracts commonly used to hedge against exposure to an asset.
In the world of DeFi, prediction markets are smart contracts that hold users’ funds and track the outcomes they are betting on. Once the event has passed, winners are paid out, and losers are liquidated automatically. The odds are dynamically calculated based on the amount bet on one outcome versus another by all users - similar to liquidity pool rates. They often require Orcales to pull information in order to settle outcomes.
Decentralised Autonomous Organisations
Decentralised Autonomous Organisations (DAOs) are made up of smart contracts that enforce predefined rules. They act as a community, with token holders able to vote on proposals, decentralising the decision-making process for organisations. They aim to create more bottom-up decisions with oversight and management, similar to a traditional corporation.
The weight of a user's voting power is derived from the number of tokens they hold, with the concept being that invested users are more likely to vote for beneficial proposals.
