Since it first gained prominence in the DeFi summer of 2020, DeFi has continued to gain worldwide adoption in spite of the recent security challenges the sub-sector has recently faced.

The allure of solid, minimal-risk returns uncorrelated to crypto market movements is what has drawn — and continues to draw — many investors out onto the ice with DeFi. In this article, we take a look at the history and use cases of DeFi, all of which are important for both private and professional investors considering investing in DeFi.

History of DeFi

It is generally believed that the term ‘DeFi’ was coined by Ethereum developers and entrepreneurs in a 2018 Telegram chat including Inje Yeo of Set Protocol, Blake Henderson of 0x and Brendan Forster of Dharma.

The name ‘DeFi’ was born out of the need for a term describing the movement of open financial applications being built on Ethereum. Among the other options considered were Lattice Network, Open Financial Protocols, and Open Horizon. Ultimately, the group settled for DeFi as, according to Henderson, it came out as DEFY.

DeFi as it is known today took off after 2017 as blockchain began to become globally popular. Smart contract architects wanted crypto users to do more with their money outside the official financial system. As a result, early-day DeFi platforms such as MakerDAO (2017), Compound Finance (2018), and Uniswap (2018), served as launchpads for other protocols to come on board.

DeFi’s Solutions: The Move From TradFi to DeFi

Simply put, DeFi seeks to eliminate the middleman in processes traditionally performed by banks and financial institutions such as lending, borrowing, market making, insurance coverage, and more. It enables investors to interact directly with one another on a peer-to-peer (P2P) basis by providing liquidity, loans or other financial services for trading and assuming those roles/functions in exchange for fees, albeit while also bearing the risks.

Key themes with TradFi include: (1) the trust-based nature, as you must trust your bank as the sole counterparty; (2) that large barriers to entry remain, as many emerging nations still have more than half their populations unbanked, and that (3) TradFi institutions are often expensive, slow, and unfriendly to customers.

In stark contrast to TradFi, DeFi is built on code and smart contracts and eliminates the need for trusted intermediaries; agreed-upon terms are recorded on and executed via blockchain mechanisms. With the spread of internet coverage, low-cost smartphones and educational materials, accessibility to DeFi has skyrocketed. What’s more, access to DeFi services are available 24/7/365, unlike TradFi. This is conveyed in the symbolic epigram that “crypto/DeFi never sleeps.”

The Revolutionary Use Cases In DeFi

In addition to the conventional use cases in DeFi — which includes lending, staking, yield farming — several nascent use cases have revolutionized the DeFi space and further positioned it to replace traditional finance. These use cases are discussed below

#1. Synthetic Assets

Synthetic assets are tokenized versions of real-world derivative assets. In traditional finance, derivatives allow traders to trade assets such as metals and stocks without having to own them. The trader gains (or loses) from price fluctuations of assets they don’t own. Synthetic assets improve the real-world derivatives by bringing these assets to the blockchain and creating synthetic versions of these derivatives, which are pegged to the real world assets, and opening the financial markets beyond limitations to people who have been excluded from the traditional asset markets.

#2. Insurance

Insurance in the traditional sense is another exclusive industry, considering its importance in a financial system. With conventional insurance programs, cumbersome paperwork, bureaucratic claim procedures and outdated auditing systems have shut millions out of proper coverage.

DeFi insurance protocols such as UnoRe have redefined insurance by providing insurance coverage to DeFi protocols in case of hacks and other cyber attacks.

#3. Digital Identification

Blockchain-based digital identity systems have gained adoption in recent months, and combining DeFi protocols with this makes access to the global economic system much easier.

With digital identification systems in DeFi, users can access data from any location with an internet connection. This is one of the most important ways through which DeFi eliminates the world order that alienated millions from the global financial system.

#4. Decentralized Autonomous Organizations (DAOs)

DAOs are DeFi’s equivalent of the large investment banks and centralized financial institutions’, only that decision-making in DAOs is completely decentralized and ownerless. With DAOs, members vote on key decisions, such as what assets to invest in, what decision a protocol should take, and many more.

Decentralized autonomous organizations were developed by the Ethereum blockchain ecosystem to service all financial processes such as asset management and investment, fund-raising, governance, and so on.

With DeFi, we are witnessing and will continue to witness the creation of a new trillion-dollar industry that will eventually overtake conventional finance and give financial access to people all over the world, irrespective of class, race, gender and creed.

Hopefully, this brief look at the history and use cases of DeFi will give you some insight into where we're headed with this exciting technology. And yes, we're aware that there are plenty more DeFi applications than what we've mentioned here. But for now, hopefully, this serves as a good introduction to the wonderful world of decentralized finance.

About UnoRe

Uno Re is building a fully secure decentralized insurance ecosystem to serve our institutional and individual clients. Despite daily heavy losses incurred by DeFi exploits, our clients can rest easy with our customizable, affordable, and convenient coverage

Our insurance platform has sold more than $10 million in coverage across various crypto protocols and has more than $4.4 million in an active capacity, with risk underwritten for over 85 different protocols and 6 stablecoins on our B2C Insurance Sales dApp — The Cover Portal.

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