What is DEFI? Decentralized Finance Explained (Ethereum, MakerDAO, Compound, Uniswap, Kyber)

have you ever heard about defy before are defy apps the ultimate killer apps in the crypto space or just new hype no matter if you never heard about this eye before or you want to make sure you understand it right this video is for you defy or decentralized finance is a movement that aims at making a new financial system that is open to everyone and doesn't require trusting intermediaries like banks to achieve that defy relies heavily on cryptography blockchain and smart contracts smart contracts are the main building blocks on defy if you don't know what smart contracts are or you want to refresh your knowledge you can pause this video and watch my introduction to smart contracts video first it's worth noticing that currently most is not pretty much all of the defy projects are built on etherium the main reason for this is the idioms fairly robust programming language called solidity that allows for writing advanced smart contracts that can contain all the necessary logic for the defi applications besides that each hiriam has the most developed ecosystem across all the smart contract platforms with thousands of developers building new applications every day and the most value locked in smart contracts which create an additional network effect in fact all the defy protocols mentioned in this video are built on a theorem now let's see how it all started one of the first projects that started the decentralized finance movement was maker Dow maker Dow founded in 2015 allows user to lock in collateral such it and generate died a stable coin that by using certain incentives follows the price of u.s. dollar die can be also used for saving on makers Oasis platform this recreates one of the pillars of the financial system lending and borrowing in fact defy is trying to create the whole new financial ecosystem in a permissionless and open way lending and borrowing is only one part of this ecosystem some of the other important parts are stable coins decentralized exchangers derivatives margin trading and insurance let's talk about each of the categories one by one besides maker Dow that we just mentioned there are a few other important defi products in this category the main one is compound compound at the time of creating this video is the biggest defi project in the lending category with around six hundred and thirty million dollars worth of assets locked in the protocol compound is an algorithmic autonomous interest rate protocol that allows users to supply assets like eater but zero X or tether and start making interest supplied assets can also act as collateral for borrowing other assets another popular defi project in this category is other with clever use of smart contracts and certain incentives we can create a stable coin that is pegged to the u.s. dollar without having to store dollars in the real world we already mentioned maker Dow that essentially allows the users to lock in their collateral and generate die-die is a good example of an algorithmic stable coin besides dye there are multiple other non algorithmic stable coins like USD T USD C or PACs the main problem with them is the fact that they are centralized as there is a company behind them that is responsible for holding the equivalent of the value of stable coins in the US dollar or other assets nevertheless this table coins gained a lot of popularity and are extensively used in defy applications like compound or other decentralized exchanges or Dex's in opposite to standard centralized crypto exchanges allow for exchanging crypto assets in a completely decentralized and permissionless way without giving up the custody of the coins there are two main types of taxes the liquidity pool based and the order book based ones a few examples of the liquidity pool based ones are unis WAP khyber balancer and Bank or loop ring and I Dex are examples of the order book based ones similarly to traditional finance derivatives are contracts that derive their value from the performance of an underlying asset the main defy application in this space is synthetics which is a decentralized platform that provides on chain exposure to different assets margin trading also cimoli to traditional finance is the practice of using borrowed funds to increase a position in a certain asset the main defy apps in the margin trading space are dy/dx and Fortran insurance is yet another part of traditional finance that can be reproduced in decentralized finance it provides certain guarantees of compensation in return for a payment of a premium one of the most popular applications of insurance in the defy space is protection against smart contract failures and protection of deposits the most popular defy projects in this space are Nexus mutual and open another really important although not strictly limited to finance part of the defy ecosystem our Oracle services that focus on delivering reliable data feeds from the outside world into the smart contract the most popular project in this space is chain link these are pretty much all the main parts of the defy ecosystem they can also be combined together in multiple various ways we can think about them as many Legos as more complicated defy products can be built on top of the existing blocks let's compare the main differences between D Phi and C Phi that stand for centralized or traditional finance but before we do that if you already made it that far don't forget to smash the like button to help this channel grow defy permissionless no k YC c 5 permission k YC sanctions d phi open open source encouraging free collaboration c phi closed closed source decisions made behind closed doors defy censorship resistant C Phi can be censored D Phi cheaper mostly network fees C Phi expensive intermediaries charging hefty fees D Phi built on the blockchain CFI built on old foundations before we wrap up this video we have to also mention the potential risks associated with D Phi one of the main risks are bags in smart contracts and protocol changes that can affect the existing contracts we describe them in more details in the previous video about smart this is also when users can take additional insurance to lower the risk of potential issues besides that we always have to check how decentralized a defy project really is and what is the shutdown procedure if something goes wrong the someone have an admin key that can be used to shut down the protocol or maybe there is some untrained governance in place to make such a decision on top of that we have to always account for the more systemic risk that can be caused by for example asset prices sharply losing their value which may result in a cascade of liquidations across multiple defy protocols network fees and congestion can also be a problem especially if you want to avoid liquidations and we are trying to let's say supply more collateral on time upcoming etherium 2.0 and second layer scaling solution can help to solve this problem there is also a set of more subtle features or changes that apply to one of the protocols may incentivize users to certain non-obvious actions that can cascade across multiple protocols a good example of something like that would be a recent distribution of competence in the compound protocol that caused users to get into seem to be non profitable high interest borrowing that was actually profitable due to being rewarded in the additional competence even though situations like that can be quite dangerous they make the whole ecosystem stronger and less vulnerable to similar situations in the future as you probably already noticed d-phi is a super interesting and vibrant space that is full of opportunities although we have to remember that this is still a very nascent industry so it's a high risk and a high reward game defy is the closest thing that can actually disrupt the traditional financial industry in opposite to most of the same tech companies defy is built on the new rails instead of relying on the outdated technologies and procedures currently most of the financial products can be only created by banks Defy is open permissionless and enables cooperative work in a similar way to the Internet although DIF is currently built predominantly on aetherium with more adoption of interoperability protocols we may see more projects being built on different chains in the future this was only an introduction to defy in the following videos we'll be focusing on each part of the DI ecosystem separately so stay tuned and subscribe to the channel if you find this video informative hit the like button and don't forget to subscribe if you're interested in defy crypto and financial technology thanks for watching

Channel: Finematics

Views: 408,972

Rating: 4.9728026 out of 5

Keywords: defi, crypto, ethereum, decentralized finance, compound finance, ethereum defi

Id: k9HYC0EJU6E

Length: 12min 23sec (743 seconds)

Published: Thu Jul 02 2020

Reddit Comments

[u/TheGoonbergReport]

Getting ready for the "but the market cap" whiners.