DeFi is short for “decentralized finance”

It could potentially cut out the globalist banker leeches that are fucking us over. (Maybe)

Most applications that call themselves “DeFi” are built on top of Ethereum

That’s because Ethereum’ is set up for smart contracts – which automatically execute transactions if certain conditions are met.

With smart contracts at the core, dozens of DeFi applications are operating on Ethereum, and Ethereum 2.0, a coming upgrade to Ethereum, could give these apps a boost by improving Ethereum’s scalability issues.

The most popular types of DeFi applications include:

In addition to these apps, new DeFi concepts have sprung up around them:

Lending markets are one popular form of DeFi, which connects borrowers to lenders of cryptocurrencies.  One popular platform, Compound, allows users to borrow cryptocurrencies or offer their own loans. Users can make money off of interest for lending out their money. Compound sets the interest rates algorithmically, so if there’s higher demand to borrow a cryptocurrency, the interest rates will be pushed higher.

DeFi lending is collateral-based, meaning in order to take out a loan, a user needs to put up collateral – often ether, the token that powers Ethereum. That means users don’t give out their identity or associated credit score to take out a loan, which is how normal, non-DeFi loans operate.

Another form of DeFi is the stablecoin. Stablecoins peg cryptocurrencies to non-cryptocurrencies, such as the U.S. dollar, in order to keep the price stable.

One of the oldest DeFi applications  on Ethereum is a so-called “prediction market,” where users bet on the outcome of some event, such as an election.

The goal of the participants is to make money, though prediction markets can sometimes better predict outcomes than controlled methods, like polling. Centralized prediction markets with good track records in this regard include Intrade and PredictIt. DeFi has the potential to boost interest in prediction markets, which have traditionally been shut down by governments.

The value locked up in Ethereum DeFi projects has been exploding, with many users reportedly making a lot of money.

Using Ethereum-based lending apps, as mentioned above, users can generate “passive income” by loaning out their money and generating interest from the loans.  Yield farming, described above, has the potential for even larger returns, but with larger risk. It allows for users to leverage the lending aspect of DeFi to put their crypto assets to work generating the best possible returns. However, these systems tend to be complex and often lack transparency.

No, it’s risky. Many believe DeFi is the future of finance and that investing in the disruptive technology early could lead to massive gains.

But it’s difficult for newcomers to separate the good projects from the bad. And there has been plenty of bad.

As DeFi has increased in activity and popularity through 2020, many DeFi applications, such as meme coin YAM, have crashed and burned, sending the market capitalization from $60 million to $0 in 35 minutes. Other DeFi projects, including Hotdog and Pizza, faced the same fate, and many investors lost a lot of money.

In addition, DeFi bugs are unfortunately still very common. Smart contracts are powerful, but they can’t be changed once the rules are baked into the protocol, which often makes bugs permanent and thus increasing risk.

While more and more people are being drawn to these DeFi applications, it’s hard to say where they’ll go. Much of that depends on who finds them useful and why. Many believe various DeFi projects have the potential to become the next Robinhood, drawing in hordes of new users by making financial applications more inclusive and open to those who don’t traditionally have access to such platforms.

This financial technology is new, experimental and isn’t without problems, especially with regard to security or scalability.

Developers hope to eventually rectify these problems. Ethereum 2.0 could tackle scalability concerns through a concept known as sharding, a way of splitting the underlying database into smaller pieces that are more manageable for individual users to run.

Ethereum 2.0 isn’t a panacea for all of DeFi’s issues, but it’s a start. Other protocols such as Raiden and TrueBit are also in the works to further tackle Ethereum’s scalability issues.

If and when these solutions fall into place, Ethereum’s DeFi experiments will have an even better chance of becoming real products, potentially even going mainstream.

While Ethereum is top dog in the DeFi world, many proponents of Bitcoin share the goal of cutting the middleman out of more complex financial transactions, and they’ve developed ways to do so using the Bitcoin protocol.

Companies such as DG Labs and Suredbits, are working on a Bitcoin DeFi technology called discreet log contracts (DLC). DLC offers a way to execute more complex financial contracts, such as derivatives, with the help of Bitcoin. One use case of DLC is to pay out bitcoin to someone only if certain future conditions are met, for example, betting on the outcome of a sports event.

Well that sort of makes sense, but I still don’t really get all this – first question – apart from Etherium, what other tokens are popular for Defi?