Mapping the DeFi Ecosystem in 2022
Filip Dimkovskion September 23, 2022.
DeFi, or decentralized finance, is a new financial technology that's revolutionizing how we think about future finance. The term "DeFi" was initially coined in 2018 by a team of developers working on Ethereum with the simple goal of improving existing financial systems. The DeFi space seeks to do this by implementing blockchain technology—the same technology behind cryptocurrencies.
This space has been rapidly growing in the last couple of years, and with this growth, has split into multiple segments referred to as layers. Let's explore this further.
Layers of the DeFi Ecosystem
The DeFi space consists of four main layers. Let's cover them in a bit more depth.
Also known as the front-end layer, this is the part of DeFi that most crypto enthusiasts interact with daily. This first layer consists of wallets and DeFi Hubs, which make the features of blockchain technology available to the users.
Some of the most popular wallets are MetaMask, Phantom, and the Coinbase Wallet. They allow you to buy and sell crypto while interacting with other users on the blockchain. Alternatively, DeFi Hubs like Zapper are platforms that allow you to actively engage in the world of decentralized finance by staking, yield farming, and providing liquidity.
» Want to explore more about wallets? Discover the different types of crypto wallets
The second layer holds the basic infrastructure of the DeFi ecosystem, and as the name says, it consists of multiple chains. Some of the most popular ones are Ethereum, the Binance Smart Chain, and Polkadot. These chains provide the essential infrastructure for DeFi applications to run on top of them.
So, why is the chain layer important? Well, this layer allows different DeFi protocols to communicate with each other and interact with each other's data. Without it, the DeFi ecosystem would consist of a bunch of isolated blockchains with very restricted communication.
On top of the chain layer is the primitive layer, consisting of multiple protocols with unique features. The protocols in question are the building blocks of the DeFi ecosystem that provide different services to users. Decentralized exchanges (DEX), derivate platforms, and lending protocols are the main components of this layer.
Some of the most popular protocols in the primitive layer are Maker, Compound, and Uniswap. Almost all of the protocols in the primitive layer offer a unique service that's essential for the DeFi ecosystem as a whole. For example, if you want to buy some crypto but don't want to do it at a centralized platform like Binance, you can head over to Uniswap (a DEX) and get the job done.
Being built on both the primitive and chain layer, the aggregation layer is often seen as one of the main catalysts for wide-scale adoption of crypto and DeFi. Since the layer is already built on two other layers, it's designed for optimized experience and usability. However, the aggregation layer doesn't consist of only one segment—it has supply-side protocols and demand-side aggregators.
Supply-side protocols are the ones that aggregate (i.e., combine) the funds from multiple protocols and properly distribute them. Demand-side aggregators receive requests from users (like trades or buy orders) and disperse them with optimized efficiency as the primary goal.
Key Features of DeFi
Let's go over the main features of DeFi and see what it offers to its users.
Borrowing and Lending
Unlike traditional finance (TradFi), DeFi has made it easy for people to borrow and lend funds, which is one of the main reasons for its popularity. Thanks to protocols built on the blockchain, users can lend out their crypto to others on the blockchain and earn passive income while doing it. Alternatively, DeFi also features borrowing, meaning that you can get quick access to crypto in case you need it without going through tedious processes like with TradFi.
» What is Tradfi? Read up on all the essentials
Staking is often used in conjunction with lending, but they're usually not the same thing. Lending refers to lending out your crypto to other users on the same protocol. When they use your funds for a transaction, you'll receive a small fee as passive income. However, staking refers to locking your funds on the protocol for any reason (usually to improve liquidity or security). It's also worth mentioning that staking is often done on a much longer timeframe (usually no less than three months), while lending could be a one-time thing.
» Want to know more? Discover the difference between staking vs yield farming
Synthetic assets are cryptocurrencies that represent real-world assets. Often called synths, these assets mimic the price of any asset you can imagine—gold, silver, stocks, bonds, fiat currencies, and much more. They make it easy for newcomers to invest in any market with the practicality and decentralization that crypto offers and still enjoy the same returns.
» Curious about synthetic assets? Here's what you need to know
Non-fungible tokens (NFTs) have rapidly expanded on the market in the last few years. NFTs are both immutable and verifiable, which are the two main features why new investors keep coming to them as an asset class. On top of that, NFTs are not only used as a store of value or for investment purposes—they're also used to represent art, real estate, files, etc.
» Are NFTs worth it? Discover whether NFTs are a good investment
What Is Next For DeFi?
All things considered, the DeFi ecosystem is still in its early days, which is precisely why it's so hard to predict the future. Even though we've seen a lot of growth in the last few years, it's still not enough for mass adoption. In order for that to happen, we need more protocols, deeper integration between layers, and better awareness.
This is why in the next few years, we can expect to see a lot more interoperability between protocols, meaning that users will be able to move their funds between different protocols with ease. Additionally, we can also expect to see more NFTs being used in DeFi for lending, borrowing, and other financial services.
All in all, the DeFi ecosystem is still in its early days, but it has a lot of potential. In the next few years, we can expect to see more growth and wider adoption from it.