The opinions are those of the author and do not represent the official standpoints of the companies mentioned.
DeFi is the oddly SciFi acronym for Decentralized Finance, the alternative finance system that developed from blockchain technology, and Ethereum in particular.
“Dapps”(decentralized applications) are the backbone of this system and they trade currency directly via smart contracts, with no additional third party. Dapps have developed to be able to work together and execute complex financial transactions, bypassing the protocols of current financial institutions.
DeFi currently holds an estimated $13.74 Billion USD worldwide, according to DeFi Pulse. Many DeFi assets escalated in value rapidly this summer after investors conducted extensive “yield-farming.” Yield-farming is essentially locking up digital assets in exchange for future rewards within that system. Yield-farming can be done leveraging stablecoins such as Dai, Tether, and USD Coin, as well as cryptocurrencies such as Bitcoin and Ethereum. This process of liquidity mining has become the standard for motivating contributions to new projects within the decentralized network. Yield-farming is becoming increasingly popular; however, scalability and security concerns limit it’s value.
The Stacks 2.0 system from Blockstack, as explored in a previous blog, operates by offering BTC rewards for mining and stacking. While this is similar to other dapps, there is one critical advantage. DeFi has been plagued by security issues so far from its deregulated nature, tempting hackers into the system at every level. In the Stacks 2.0 model, all new development stays anchored to the most secure chain, Bitcoin. Likewise, Clarity Smart contracts are being introduced to improve the complete Proof-of-Transfer process with critical upgrades such as addressing reentrancy, access control, denial of service and other previous drawbacks of smart contracts. Those upgrades are explained in depth here. While DeFi remains a high-risk system, many see it as the next logical stage in the evolution of global finance. In spite of inherent volatility, the critical infrastructure and development teams involved continue to improve.