Decentralized Finance (DeFi)

Introduction to Decentralized Finance

DeFi is a critical component for blockchain-based networks. As a whole, DeFi refers to the collective term of financial services/instruments on a peer-to-peer public blockchain network.

With DeFi, the same services that exist within the legacy financial world exist - granting one to earn interest, borrow, lend, insure, trade derivatives, assets, and more.

The key separation point between the legacy financial world is through DeFi - this process is not only faster but decentralized. That is, these services are global, peer-to-peer, pseudonymous, and open to all.

DeFi Primitives

DeFi within an existing public blockchain network can best be characterized by the following “building blocks”.

Image Courtesy: Hover Labs

Each of these building blocks represent something known as primitives. That is, a specific piece/application that is needed to build on to further succession of applications.

These primitives fit into a mold that can best be understood in the structure of a building. In order to create such structure, there needs to be certain pieces/applications already in place - otherwise the foundation behind that structure will be characteristically weak.

This structure, once gradually added onto over time creates a DeFi landscape across a public blockchain network allowing for the addition of higher-level DeFi applications. These higher-level applications will allow for a public blockchain network to have more assets flow between the network and create greater utility. DeFi Examples on Tezos

Decentralized Exchanges: This type of exchange refers to one which enables the trading of various digital assets in a peer-to-peer form. This form dissuades the need for an intermediary or centralized, single party. Today, you can trade tez and related FA2 supported assets on Dexter and soon to be released on mainnet - Quipuswap.

Token Standards: Token standards refer to the subsidiary of smart contract standards. Today, ERC-20 is one of the most popular token standards based on the Ethereum network. Within Tezos, the latest token standard is FA2 and this standard supports a wide range of token types - fungible, non-fungible, non-transferable, as well as multi-asset contracts.

Wrapped Assets: A wrapped asset is one which bridges another asset from a different native public blockchain network to the one in which it is wrapping itself to. Wrapped assets not only improve the functionality and usability of the asset in which it is wrapped to, but also opens up a wide array of higher-level financial services that wouldn't be available previously. On Tezos, we’ve seen the addition of Wrapped ETH (ETHtz), Wrapped Tezos (wXTZ), and the addition of over 20 ERC-20 assets from Bender Labs coming in the near future.

Cross-Chain Swaps: A cross-chain swap (Atomic Swap) refers to the action of exchanging two different cryptocurrencies through a peer-to-peer form. This process enable two parties to exchange between each other trustless and w/o third-party moderation. Today, TEZEX is currently in development and will enable cross-chain swaps.

On-Chain Price Oracles: Oracles refer to the off-chain data sources that provide an answer to specific questions/information that cannot be directly obtained on-chain. Through the usage of oracles, information such as price and more can be obtained and trusted - through the amalgamation of multiple price feeds (oracles). On Tezos, Harbinger oracles provide this service as well as Kaiko. A Chainlink integration is expected in the near future by the SmartPy team.

Stablecoins/Synthetic Assets: Stablecoins refers to assets that are backed typically by a reserve asset and offer price stability against an underwise volatile native asset. Synthetic assets are those in which provide opportunity for a various array of assets that are not native to the underlying asset - nor require one to hold the underlying asset.

Today, the Kolibri stablecoin is running on testnet and USDS has launched on mainnet - fully backed by fiat reserves and regulated by Prime Trust, a Nevada-chartered trust company that also acts as the regulated administrator of USDS. A synthetic exchange project is expected to launch on Tezos in Q1 2021.