A New Era of Blockchain-Powered Decentralized Finance (DeFi) - A Review

The Bitcoin whitepaper [1] published in 2008 pro-posed a novel decentralized ledger, later called blockchain, which enabled multiple transacting parties to agree upon the shared state of the ledger without a trusted intermediary. Blockchain technology has been used to implement many decentralized payment systems, with the general term Cryptocurrency coined for the native unit of values. The launch of the Turing-complete Ethereum blockchain [2] in 2015 extended the scope of blockchain-based financial systems beyond cryptocurrencies. The suite of non-custodial financial solutions deployed as Smart Con-tracts over Turing-complete blockchains is broadly called Decentralized Finance (DeFi). These solutions have gained widespread popularity as investment vehicles in the last two years, with their total value locked (TVL) exceeding USD 100 Billion. This paper reviews the key financial services offered in DeFi and draws a parallel to the corresponding services in the centralized financial industry. Some technical and economic risks associated with the DeFi investments are also discussed in the paper. Most of the existing review papers on DeFi focus on some specific DeFi services, are theoretically inclined, and are intended for academics in computer science or economics. This paper, on the other hand, aims to give an overview of the current state of the DeFi ecosystem. We aim to keep this review lucid to make it accessible to a broader audience without compromising academic rigor. The intended audience for this paper includes anyone with a basic understanding of financial markets and blockchain systems. This work will be specifically helpful for investment professionals to understand the rapidly evolving ecosystem of DeFi services.