DeFi and the Future of Finance

VIDeFi DEEP DIVE

DeFi can be loosely broken into sectors based on the functionality type of the dApp. Many dApps could fit into multiple categories, so we attempt to place them into the most relevant category. We examine DeFi platforms in the taxonomy of lending/credit facilities, DEXes, derivatives, and tokenization.¹ We mainly focus on the Ethereum network due to its popularity, but DeFi innovations are occurring on many blockchains including Stellar and EOS.² Polkadot³ is another platform that employs a type of proof-of-stake consensus.

CREDIT/LENDING

MakerDAO

MakerDAO⁴ (DAO is a decentralized autonomous organization) is often considered an exemplar of DeFi. For a series of applications to build on each other, there must necessarily be a foundation. The primary value-add of MakerDAO is the creation of a cryptocollateralized stablecoin, pegged to USD. This means the system can run completely from within the Ethereum blockchain without relying on outside centralized institutions to back, vault, and audit the stablecoin. MakerDAO is a two-token model where a governance token MKR yields voting rights on the platform and participates in value capture. The second token is a stablecoin called DAI – a staple token in the DeFi ecosystem with which many protocols integrate, including a few we will discuss later.

DAI is generated as follows. A user can deposit ETH or other supported ERC-20 assets into a vault, which is a smart contract that escrows collateral and keeps track of ...