Author name: @nobumei (https://twitter.com/nobu_mei)
<aside> 💡 This page explains the innovations that DeFi makes possible
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In the previous sections, we have described DeFi and its market size. In this section, we will explain DeFi's innovative nature.
DeFi is built on three major waves of blockchain innovation over the past decade.
The first is Bitcoin, the second is Ethereum, and the third is tokens. Bitcoin created the blockchain, Ethereum implemented smart contracts, and the high liquidity (volume of transactions) of tokens created DeFi to provide new financial services to the market.
â—†Permissionless and Transparency in the DeFi Protocol
The DeFi protocol reflects Ethereum's decentralized values, always following permissionlessness and transparency, allowing anyone in the world to lend, borrow, or trade cryptocurrency without the need for banks or brokers.
This "transparent, permissionless access to everyone" is important. From the user's perspective, DeFi can serve anyone in the world, regardless of ethnicity, gender, age, assets, or political affiliation, as long as they have an Internet connection. From the developer's perspective, they can build dApps with confidence, knowing that there is no central authority that can revoke access in the future.
DeFi transactions are transparent, the software is in principle open source, and because it is open source, all underlying code is permanently verifiable. All transactions are recorded decentrally on the blockchain, making decentralized financial services that do not belong to any one country fairly accessible to everyone around the world.
â—†Low barriers to entry and ease of dApps development
The two fundamental properties of DeFi, "permissionless" and "transparency ", create multiple strong use cases.
The permissionless nature of DeFi means that there are no restrictions on copying and rewriting code. This can reduce the barrier to entry for newcomers to near zero, making dApps as easy to develop as assembling Legos.
For example, if you wanted to add a currency exchange function to a web service you were developing, you would have had to create the function yourself or contract with another service provider for joint development. With DeFi, however, you can connect to a DEX like Uniswap and integrate it into your own service. DeFi does not need to obtain permission to connect to Uniswap, which means that it is Permissionless.
In addition to Uniswap, various functions related to finance are modularized like Legos, so you can create a new DeFi by combining them, which is a factor that intensifies development.
â—†Low switching costs
It is mainly the end users who benefit from the low barriers to entry and ease of dApps development. Since all DeFi use the same Ethereum as the data layer, it is easy to move assets between applications. This lowers switching costs for users and makes it easier to switch to other DeFi protocols.
This makes DeFi protocols fiercely competitive in terms of fees and user experience. The low user switching costs also naturally lead to the creation of DeFi with optional features such as aggregators.