Decentralized finance was one of the triggering events of the bull cycle in 2021. Its beginnings appeared in early 2020, it then took several months for this enthusiasm to translate into a rationalization of the value offer and a real capitalization of this sector.

Decentralized exchanges

A decentralized exchange includes all the services offered by a centralized exchange (eg Coinbase, Binance, Bitstamp), with the difference that the liquidity is not provided by a centralized entity, but by a group of individuals. When a purchase is made on Binance, the platform is required to draw on its liquidity reserves to be able to respond to the buy or sell order. It guarantees the level of liquidity of its service. Decentralized exchanges rely on users who will deposit at parity a pair of cryptocurrencies to provide liquidity in trades between them. In return, the user receives a liquidity token which will guarantee him part of the fees charged during this operation.

This concept makes it possible to carry out exchanges without depending on a centralized entity, to retain full control over its cryptocurrencies (no delegation of the management of private keys) and to avoid certain identity verification processes.

Lending and borrowing platforms

Like decentralized exchanges that allow peer-to-peer exchanges of cryptocurrencies, blockchain has been able to remove the intermediary that banks are in the process of lending and borrowing funds.

Here, it will be a question of allowing entities to deposit cryptocurrencies (ex: Bitcoin, USDT, etc.) within a platform (ex: AAVE) so that other entities can borrow these liquidities in order to carry out financial transactions. The lending entity will therefore receive interest for having been a source of liquidity. The borrowing entity, for its part, will have to provide a certain level of collateralization for its loan, pay interest and repay its loan on time. All of these conditions are managed automatically and securely through the use of smart contracts.

This mechanism greatly improves the growth of unused cash for individuals and businesses and allows a greater number of people to use cash leverage to increase the profitability of their financial operations.

Yield platforms

More commonly known as “Yield Farming”, these platforms provide tools for finding the best interest rates for the supply of liquidity on the platforms mentioned above.

Additional platforms (oracles, swap, bridge, optimization, insurance, derivatives)

The decentralized finance sector depends on a number of ancillary players to function. From oracles that allow information from the traditional world to enter that of the blockchain, to “swaps” that facilitate the exchange of cryptocurrencies via liquidity reserves contained in smart contracts, and “bridges” that open up the possibility to switch from one protocol to another, to the optimization platforms of “Yield farming” which perform an automatic conversion of the interests generated in a cryptocurrency into those of the target liquidity pool to further increase the interests perceived. The world of decentralized insurance is also booming, whether to cover risks arising from new DeFi applications or for flaws in smart contracts.

This ecosystem, driving market growth since 2020, opens up a new field of possibilities in the finance sector, for individuals and businesses alike.

Our position toward this sector

Decentralized finance is arguably one of the fastest growing use cases for blockchain protocols. Removing middlemen in a run-down ecosystem has been evident for many application areas, greatly improving operational efficiency.

The major obstacle we see to the growth of this sector is both technical (depending on the offer issued by the underlying protocols) and both relating to the user experience, where a layman can quickly find himself lost difficulties in understanding the ecosystem and all the offers they offer.

At the technical level, we have seen that Ethereum quickly limits the profitability of many operations by its usage costs that are far too high for certain capital movements, which explains in particular the ground gained by the Binance Smart Chain, Solana, Avalanche and Terra. these last months. Although Polygon has improved this level of accessibility, the lack of liquidity or capacity

‍