Author name: @nobumei (https://twitter.com/nobu_mei)
<aside> 💡 This page describes DeFi.
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In the previous sections, we have explained Ethereum, which is an established and steadfast player in the BaaS market. In this chapter, we will discuss DeFi, one of the dApps on top of BaaS.
◆DeFi for financial business without companies.
“DeFi"stands for "Decentralized Finance," an application created with the aim of conducting financial business without centralized players such as banks and securities companies. With the creation of DeFi, existing financial operators are now also referred to as "TradeFi" and centralized Crypto operators, such as crypto asset exchanges and others, as "Centralized Finance (CeFi)".
To help you visualize DeFi, we will use the example of a bank.
For example, a bank collects deposits, makes loans to businesses and other entities to earn interest, and returns the interest to individuals who have deposited money with the bank. This mechanism can be roughly divided into the simple functions of "deposit" and "lending. In order for the bank to perform this function, it would require bank staffing costs. Programming this function would also increase efficiency, but would incur program management fees.
Comparison of CeFi and DeFi
DeFi seeks to build a financial market that does not depend on a specific entity, such as a state or a company, by making the program a smart contract. Compared to CeFi, DeFi has significantly lower costs to operate, including personnel, operating, and credit costs, allowing for higher efficiency and higher profitability.
◆DeFi's versatility
The advantage of having the program as a smart contract is that it cannot be tampered with, but the disadvantage is that if there is a bug, it cannot be fixed. It is not a problem if you know about the bug, but most of the time it is malicious hackers who discover the bug. It is too late to discover the bug after the hacker has attacked and caused the outflow of funds. No one wants to use a service that is likely to be contaminated with bugs.
Therefore, it is recommended to partially use smart contracts that are already in operation rather than putting programs on new smart contracts. Programs that are made into smart contracts can be reused by anyone and are also called "money lego" because of their versatility.
◆Rapidly growing DeFi market
DeFi began to gain momentum around 2020, with several products released around 2017. Although the market is still in its infancy, its market size is rapidly becoming huge.
TVL(Total Value Lock) (see p. ●●) is used as an indicator to calculate the market size of DeFi. This "Value Lock" part is the key point and refers to how much value is locked in the smart contract. The "deposit value in a smart contract" part may be confusing, but this is the same as "depositing money in a bank." By placing programs on smart contracts that describe conditions such as "deposit and receive interest," "only the depositor can withdraw," etc., it became possible to create a bank-independent deposit protocol, and as a result, efficiency increased. This is DeFi.
In that sense, TVL is like a bank deposit balance. By looking at TVL, you can compare how much it is currently "worth" without knowing what the DeFi protocol is. You could replace "value" with "trust.”
Conceptual diagram of TVL
◆DeFi Market TVL
