The Ultimate Guide to DeFi: Part 1

DeFi is a revolutionary financial system that is disrupting traditional finance by offering greater transparency, security, and accessibility to users.

What is DeFi?

Decentralized Finance (DeFi) is a financial system that runs on public blockchains like Ethereum.

Unlike traditional finance, DeFi doesn't rely on banks, stock exchanges, or other centralized institutions to manage transactions.

DeFi works best with non-custodial wallets like Metamask, which give you complete control over your assets. To spend / transfer your assets, you need to sign transactions with your private key. This allows for greater transparency, security, and accessibility in financial transactions.

10 most important DeFi Protocols

DeFi protocols can be of many types, with the most important ones being:

1. Decentralized Exchanges, where you can swap/trade crypto without having to provide personal information.

2. Liquid Staking Protocols, where token holders can earn staking rewards while also having the ability to trade their staked positions as liquid assets.

3. Lending Protocols, where you can lend & borrow crypto assets.

4. Bridges, which enable the transfer of crypto assets & data between different blockchain networks.

5. Collateralized Debt Positions, which allow users to lock up collateral in exchange for stablecoins. This enables investors to leverage crypto assets without having to sell them.

6. Yield Farming Protocols, which incentivize users to provide liquidity by staking tokens or providing liquidity in a liquidity pool.

7. DeFi Derivatives, which enable investors to speculate on the price movements of assets without directly owning them e.g. options, futures & synthetic assets.

8. Yield Aggregators, which help users find the highest yield opportunities and earn passive income on their crypto holdings.

9. Algorithmic Stablecoins, which maintain a stable value by using algorithms & smart contracts to automatically adjust the supply based on market demand.

10. Index Protocols, which enable users to create, trade & invest in custom indices composed of different crypto assets.

Total value locked (TVL) is the most important DeFi metric. It represents the total of all assets deposited in a DeFi protocol earning rewards, interest, new coins or tokens, fixed income, etc.

Here’s how the 10 most important DeFi Protocols compare in terms of TVL

1. Decentralized Exchanges: $19.75 billion

2. Liquid Staking Protocols: $14.34 billion

3. Lending Protocols: $13.71 billion

4. Bridges: $9.92 billion

5. Collateralized Debt Positions: $9.92 billion

6. Yield Farming Protocols: $7.1 billion

7. DeFi Derivatives: $1.48 billion

8. Yield Aggregators: $1.34 billion

9. Algorithmic Stablecoins: $1.26 billion

10. Index Protocols: $0.3 billion

Data source: DefiLlama, 2 March 2023

How you can participate in DeFi

There are many ways to become part of the DeFi ecosystem:

1. You can set up a node and become part of a blockchain network like Ethereum.

2. You can build dApps (decentralized applications).

3. You can use DeFi protocols to earn rewards & generate passive income.

What’s next?

DeFi users have a wide range of options to participate in the DeFi ecosystem and earn rewards or generate passive income.

As the DeFi ecosystem continues to grow and evolve, it is important to stay informed about the latest developments and trends in the space.

In the next edition of this series. I will explain the 10 most important DeFi Metrics, so make sure you are subscribed to the DeFi & Token Economics Blog.