- DeFi has potential serve as a foundation stone for global financial inclusion and asset ownership,
- Decentralized Finance (DeFi) has evolved as a blockchain-based form of finance that uses advances in cryptocurrencies and smart contracts to create fair, inclusive, and strong financial systems
- Since its inception, the DeFi market has developed at an exponential rate
A new research on decentralised finance has been published by the EU Blockchain Observatory and Forum (DeFi). Decentralised Finance (DeFi) has evolved as a blockchain-based form of finance that uses advances in cryptocurrencies and smart contracts to create fair, inclusive, and strong financial systems that do not rely on central financial intermediaries, according to the paper.
The EtherDelta project, which, despite being less successful than expected, prepared the path for what was to come in the years ahead, lit the first sparks of DeFi in 2017. With the debut of MakerDAO in December 2017, new financial applications (not simply money transfers) become available. In 2018, Uniswap, which facilitated trading via user capital pooled in the protocol’s smart contracts, took this a step further. In 2019, Synthetix made it possible to incentivize users to contribute to liquidity pools.
Between 2018 and 2019, more DeFi protocols, including as Compound, REN, Kyber, and 0x, were released on the Ethereum Mainnet; some of them are currently significant DeFi service providers. However, in the first 12 months, their adoption was restricted. For the first time in February 2020, the total value locked (TVL) in all DeFi protocols topped USD 1 billion.
When the COVID-19 epidemic sparked interest in the DeFi space, the young sector faced significant losses during the worldwide market crisis on March 12, 2020. After then, there was a period of hesitation until the Compound protocol released its token, which was a big role in kicking off DeFi’s summer in 2020. Yearn Finance and SushiSwap, two more protocols that were able to draw substantial liquidity, helped to expedite the movement even more. The introduction of Uniswap tokens (UNI) with improved liquidity mining functionality brought this to a close. Uniswap’s monthly volume increased from USD 169 million in April 2020 to over USD 15 billion in September 2020 as a result of this.
Any blockchain architecture must adhere to three fundamental principles: decentralisation, security, and scalability. Historically, the primary goals of the initial blockchain designs were decentralisation and security. Later, as networks grew in popularity, the issue of scalability occurred, in which networks were unable to handle enough transactions in a given amount of time. One of the major inventors of the Ethereum blockchain project, Vitalik Buterin, suggested the following trilemma in an attempt to highlight the underlying issues faced by blockchain engineers attempting to improve the scalability of their blockchains.
A blockchain can be scalable and secure but not decentralised; secure and decentralised but not scalable; or scalable and decentralised but not secure by design. If the trilemma is true, it is an open question. One of the challenges in establishing the trilemma is objectively defining decentralisation, security, and scalability. According to industry findings, realistic implementations of blockchain technology necessitate trade-offs in one of the three features in order to improve the other two.
Since its inception, the DeFi market has developed at an exponential rate, with the TVL (Total Value Locked) and wallets in use serving as the most crucial criteria for determining the DeFi market size and user base. The quantity of capital trapped inside DeFi protocols is measured in TVL. It has been rapidly rising, hitting USD 1 billion in May 2020 and more recently USD 250 billion in November 2021.
L2 scaling methods have recently been seen as a possible answer to the blockchain trilemma’s scalability issue. The execution of a transaction is divorced from its commitment to be completed on-chain in this model. This design can be implemented right away in new blockchain ecosystems. This will help in development of more advanced DeFi protocols. In future cross country financial flow may of products and services will be build on DeFi based protocols and platforms. DeFi has potential serve as a foundation stone for global financial inclusion and asset ownership, subject to regulatory architecture and bilateral and multilateral understanding between countries.
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