Total assets locked in DeFi instruments have grown almost 12x year-to-date, from $700 million in December 2019, to $8.7 bn, with a number of leading projects rolling out market-ready products throughout the year. Key value propositions of the novel financial instruments and services are stepping away from reliance on individual agents and instead leveraging seamless capital pooling from arbitrary sets of participants.
As a cutting-edge industry based on novel technology—decentralized ledgers with economically-incentivized security models—decentralized finance is heavily under-researched, especially in the area of detailed industry-wide overviews that establish a context for this field.
The present report is aimed at providing the bigger picture. We introduce the necessity and the circumstance, classify the instruments, convey the mechanics of their innovation, and demonstrate the emergent effects that have not been previously encountered—and are hard to replicate—in traditional finance.
The game-changer that DeFi is offering is arbitrary composability of decentralized instruments without additional bootstrapping costs—and without increased opacity of systemic risks. Only in DeFi does a retail investor have precisely the same capacity to perform guaranteed arbitrage, as virtually unlimited capital is available at-will, to everyone. This is only possible because the network rules guarantee repayment (within one atomic transaction), and the instruments are composable.