This document discusses decentralized finance (DeFi) and how Ethereum blockchain technology supports it. DeFi offers a trustless, global alternative to the traditional centralized financial system through permissionless, transparent, and composable applications. Most DeFi exists on Ethereum due to its ability to encode financial transactions through smart contracts. Popular DeFi applications discussed include decentralized exchanges, lending/borrowing protocols, and platforms for decentralized collaboration among developers. The future of finance is predicted to increasingly involve DeFi principles of eliminating intermediaries and encouraging open-source development.

1. Decentralised finance
(DeFi)
etherium blockchain technology

3. ⇢ Contents
⇢ 1. DeFi: the trustless solution
⇢ What is DeFi?
⇢ 2. How Ethereum supports DeFi
⇢ Decentralized versus centralized finance
⇢ 3. Investing strategies on DeFi protocols
⇢ DeFi use cases
⇢ 4. The future is DeFi

4. DeFi:
the trustless solution

5. DeFi: the trustless solution
⇢ Banks take in cash deposits, make
interest-bearing loans, and pay out
some of what they receive as
interest to depositors. That’s a
prime example of banks making
their (and your) money work for
them.
⇢ Usually, they’ll rinse and repeat this
profit-generating process time and
time again, with you getting a slice of
the action through interest paid on
your savings accounts. For the last 10
years though, that’s been pretty much
close to nothing: right now, the
average interest rate in the US is just
0.09%.

6. DeFi: the trustless solution
⇢ Throw in the occasional financial crisis and
subsequent bailout and you’ve got a tale as
old as time.
⇢ But for lots of people, that doesn’t matter:
they’re blocked from fully participating in
the financial system in the first place. 1.7
billion adults worldwide are unbanked – and
even those who are banked don’t get much
say in how the banking around them works.
In a way, then, access is still the problem
child of modern finance.
⇢ Until now. Enter DeFi.
⇢ Decentralized Finance – a.k.a. “DeFi” – is
an emerging open and global alternative
to the restrictive, centralized and
centuries-old traditional financial system
much of the world knows today. DeFi
offers anyone with a smartphone and an
internet connection the opportunity to
put their money to work on their terms
across services like investing, borrowing,
lending, and trading.

7. DeFi: the trustless
solution
⇢ Rather than have banks act as
intermediaries, DeFi puts individuals
at the center of a peer-to-peer
financial system run on open-source
blockchains like Ethereum.

8. Ethereum
How Ethereum supports DeFi

9. ⇢ Ethereum is a decentralized, open-
source blockchain that supports
smart contracts – self-executing
code that can implement virtually
any agreement. Most of DeFi exists
on the Ethereum blockchain, and
this ability to encode financial
transactions is what makes it so
powerful. Unlike centralized
finance, DeFi is uniquely:

10. ⇢ Permissionless. There are no gatekeepers
restricting who can create and participate in DeFi
services – anyone with an internet connection
can access the DeFi regardless of location. Users
have complete control over their own assets
without the need for intermediaries.
⇢ Transparent. DeFi’s open source nature makes it
easy to inspect the financial applications you use
and accurately track the movement of funds.
⇢ Composable. DeFi is an intricate network of
programmable money – think lego blocks, except
the blocks are financial products and services that
can be plugged into one another with ease.

11. How Ethereum supports DeFi
⇢ In the end, algorithms replace
manually set interest rates;
global, decentralized networks
of computers replace
expensive, centralized data
storage, and programmable,
tamper-proof agreements
replace the red tape that
characterizes so much of
traditional banking.
⇢ What’s left is a faster, more
efficient and more accessible
financial system. The basic
concepts stay the same, like
investing, borrowing, lending,
and trading – what changes is
how they’re carried out and
who has control over them.

12. DeFi
Investing strategies on DeFi
protocols

13. Decentralized
Exchanges
⇢ Decentralized exchanges (DEXs) offer an efficient way to
trade crypto without an intermediary and without giving up
custody of your funds. Popular DEXs like Uniswap, Balancer
and Curve are known as automated market makers (AMMs)
because they use liquidity pools to manage trades.
⇢ Think of a liquidity pool as a market between two or more
tokens. When someone deposits tokens to the pool, they
make themselves eligible to earn trading fees proportional to
their share in the pool. Each time someone else buys from the
market, the exchange price is determined by a smart contract
that looks at the ratio of tokens in the pool, and trading fees
are subsequently split amongst liquidity providers.

14. Lending &
Borrowing
Protocols such as Compound Finance offer one of the most
common services offered by the financial industry: lending
and borrowing of funds. If you’re paying off student loans,
banks usually charge a very high interest rate. In DeFi, banks
are replaced by liquidity pools where anyone can deposit
tokens and borrowers can take from and pay back at an
algorithmically determined interest rate. The best part is that
your money compounds in real time – every 15 seconds.

15. Decentralized
Collaboration
As DeFi has paved the way for decentralized trading and
finance tools, creators and developers are now working
together to build even more tools for the community. Gitcoin,
for instance, is a platform where decentralized projects are
funded, and educational resources are used to build open-
source projects. Another example is Radicle – a decentralized
network for code collaboration, aiming to develop open-
source infrastructure that is secure, sovereign, and
exclusively built on open protocols.

16. DeFi
The future is DeFi

17. The future is DeFi
⇢ The appeal of DeFi lies in the fact that there’s no
central bank or third-party intervention. You
own your assets completely. DeFi eliminates the
need for trust in intermediaries and instead
upholds security while encouraging open-source
collaboration. Traditional – or centralized –
financial tools are being adapted for a DeFi
world with impressive speed, so it likely won’t
be long before other industries meet a
decentralized future too.

18. That’s all for now! But you can discover more in parts two and three of this series…