What is Decentralised Finance (DeFi)?

The blockchain-based form of finance everyone’s talking about

“Decentralised Finance (DeFi) is a movement that aims to bypass traditional financial intermediaries by putting financial services on the blockchain.”

DeFi supporters believe that smart contracts will form the nuts and bolts of future financial infrastructure, on the premise that banks, brokers and other financial institutions will be made obsolete, replaced by a new generation of robust and transparent blockchain-based services.

Instead of simply decentralising transactions — as with Bitcoin — DeFi aims to decentralise the entire financial industry. This is accomplished through smart contracts, which are snippets of computer code that enable complex transfers and agreements to be carried out on the blockchain without the need for a central authority.

DeFi in action

The first wave of DeFi innovation came in the form of Initial Coin Offerings (ICOs). These allowed companies to swap corporate entities and bank accounts for smart contracts and blockchain-based tokens, and raise millions in funding without any need for the gatekeepers of traditional finance.

Since then, the innovation hasn’t stopped. DeFi developers have been busy building an infrastructure for a whole new world of blockchain-based services:

  • Decentralised exchanges such as Uniswap allow anyone to trade from anywhere with an internet connection. Anyone can swap assets directly with a smart contract, without needing a centralized exchange with an order book.

  • Lending protocols like Aave and Compound are the blockchain-based equivalent of pawn shops. Users can stash their crypto in a smart contract and borrow against it without credit checks.

  • DeFi robo-advisors such as Yearn act as decentralised financial advisors, automatically allocating digital assets across different DeFi protocols to earn the highest yield.

Compared to traditional financial services, these decentralised alternatives offer users more control over their funds, faster transactions with more transparency, and the possibility of profiting from brand new financial innovation. For example, Aave’s Flash Loans allow traders to speculate by deploying complex trading strategies without paying in advance: funds can be borrowed instantly as long as the loan is repaid within a single Ethereum transaction. Elsewhere, the Automated Market Maker design of Uniswap allows users to generate token rewards by supplying assets for others to trade against. Collectively, these DeFi innovations are creating a new form of financial plumbing to challenge the traditional financial industry. And some analysts suggest the disruption could be as historically significant as groundbreaking inventions like the printing press or the Internet.

DeFi eToro investment portfolio

As of July 2021, DeFi has helped pull $50 billion into smart contracts on the Ethereum blockchain, and it shows no signs of slowing down. In fact, the dizzying pace of DeFi innovation makes it tough for even the most informed investors to keep up.

That’s why eToro created the DeFiPortfolio. This offers an easy way to diversify your portfolio and gain exposure to the DeFi ecosystem, and automatically stay ahead of decentralised financial innovation through periodic rebalancing.

Both smart contract blockchains and a selection of leading protocols are included in the portfolio, giving you exposure to every corner of DeFi — from Uniswap to Yearn and beyond — without having to spend hours on research.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication. Cryptoassets are unregulated in some EU countries and the UK. No consumer protection. Your capital is at risk.

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