Around 2017, I came into contact with a Blockchain startup that claimed to revolutionize the financial market through a decentralized crypto Exchange, managed by the community and that would have a much better usability than any other. At that moment, I honestly didn't quite understand 'how' that would be done, but I saw that, once 'done', it could have an immense impact on the financial market.
This was my first contact with DeFi, (Decentralized Finance), or a set of platforms, applications, and protocols that simulate structures of the traditional financial market on public Blockchains like Ethereum and that, generally, have or intend to have, a distributed governance, where the community of users manages the platform.
An important point of comparison is with the movement of Fintechs. They came to improve the solutions already present in the market, that is, to do what banks and other financial agents already did, but in a more customer-focused, direct, cheap manner, etc.; to achieve this, they used various existing technologies, but they were, and are, playing the game as it is. They do not propose drastic changes to the system, they fit into the existing regulations of various countries, and many, as they grow, even transform into actual regulated banks.
In the case of DeFi, the focus is very different. What DeFi aims to create is a global financial architecture, where local rules, intermediaries, and trading logic are all defined by software and operate directly, distributed, and transparently to all who wish to use it. There is no regulator, regulated entity, geographic base, usage restrictions, know-your-customer, anti-money-laundering, compliance, and all the current legal apparatus that involves the local/global architecture of the financial market.
It is an environment of continuous innovation, as if we were creating from scratch a model of international financial market.
In this context, we already have structures for the creation of a dollar Stablecoin, such as the DAI from Makerdao7; investment and lending protocols like Aave8 and Compound; decentralized exchanges of assets like Uniswap9 and Curve; derivatives like GNS and GMX;
derivative issuers like Synthetix10, and so on. A multitude of protocols and solutions with immense growth, since my first contact.
They all share the fact that they are native to this world of non-permissioned Blockchain and, therefore, do not trade Fiat currencies.
Despite this, the large volumes transacted today are of Dollar Stablecoins like USdc, Tether, and DAI. The existence of these tokens played a vital role in the development of DeFi and are currently responsible for the vast majority of transactions on public Blockchain networks. Furthermore, practically all initiatives are developed on the Ethereum platform with several ERC-20 tokens and structures facilitated by Smart Contracts.
Next, I bring some examples of how DeFi is transforming existing products in the traditional financial market and solutions that are only possible in DeFi.