Before listing specific DeFi protocols, let's talk about the concept of DeFi. DeFi is not a pre-defined concept that is then filled with specific content by various protocols. In fact, the functions of collateralized asset issuance and decentralized trading have appeared before DeFi. DeFi is just a retrospective concept. We include protocols that implement certain financial functions on the blockchain within the concept of DeFi protocols. In this sense, DeFi simply refers to the practice of implementing financial functions on the blockchain.
It is also important to note that "decentralization" here does not mean "peer-to-peer." Decentralization does not mean "deintermediation," for example, not conducting lending and trading through banks or exchanges. Most DeFi protocols actually have strong centralization features, such as lending protocols and decentralized exchanges. The concept of decentralization here needs to be understood in the context of the blockchain, and its features include:
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The "decentralized" nature of the blockchain itself, which allows the protocol to be used without permission. Anyone can interact with the protocol through their own wallet, which is enabled by the nature of the blockchain itself.
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DeFi protocols are governed in a DAO (Decentralized Autonomous Organization) manner. Decentralization here refers to a "democratic" governance model: the protocol releases governance tokens, and the quantity of tokens held serves as voting weight, allowing participation in protocol parameter modifications, proposal reviews, protocol version updates, etc. Similar to a company's shareholders' meeting, but implemented in a decentralized manner.
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Anyone can develop their own DeFi protocol. As the testing ground for DeFi, the blockchain allows anyone to develop smart contracts, and new ideas can be turned into smart contracts to participate in market competition. This decentralization in the sense means that monopolists cannot avoid competition through policies.
In the following discussion, representative projects in various sub-fields of DeFi will be briefly introduced. The introduction will focus on summarizing the core mechanisms of the projects and will not discuss too many details. The governance methods and token economics of each project are usually unrelated to the project mechanisms, so there will not be too much discussion on those aspects.
Lending#
Lending, as the most basic financial activity, naturally appears in the field of DeFi. Before the emergence of DeFi lending protocols, CEX (Centralized Exchanges) had already provided corresponding services, such as lending one token as collateral to borrow another token. The lending demands in the cryptocurrency field mainly focus on the following aspects:
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Borrowing a certain token for shorting, in order to buy at a lower price, repay the debt, and make a profit. Traders do this when they are bearish on a token or when the price of a token on a certain exchange is higher than the market price.
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Borrowing a certain token to capture investment opportunities. Some new investment opportunities (such as ICOs, high-yield mining opportunities) require specific tokens, and when investors do not want to lose their positions, they can choose to borrow the required tokens by collateralizing the tokens they hold.
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Increasing investment leverage. For example, long-term holders of ETH can borrow stablecoins by collateralizing ETH and continue to buy ETH to increase their ETH holdings.
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Long-term investors borrow funds to cover living expenses. If someone has a long-term bullish view on a token but needs funds for daily expenses, they can collateralize the token and borrow stablecoins.
The lending logic supported by collateral is simple and does not rely heavily on off-chain processes. It is a lending method that is more suitable for code implementation. Therefore, current lending protocols are mainly implemented through collateralized lending. Unsecured loans are still in the exploration stage.
The following is a brief introduction to several representative projects in the lending field.