Table of Contents
Part 1 — Introduction
Part 2 — Stable Coins, Borrowing, and the Balanced Network
Part 3 — Money Markets, Lending, and the OMM Network
Part 4 — Automated Market Makers: Unifi and ICONPOOL
Part 5 — Optimizing Yield with Optimus
Part 6 — Where DeFi Has Gone Wrong
Part 7 — Yield Farming Strategies on ICON
Part 8 — How ICON Benefits from DeFi
If you’ve been paying even superficial attention to blockchain over the past year or so, it’s almost a certainty that you’ve heard the term “DeFi.” DeFi is short for “decentralized finance,” a new ecosystem within the blockchain industry that gained a substantial amount of momentum, hype — and infamy — throughout 2020 and is poised to remain a significant part of the blockchain ecosystem over the long-term.
Thanks to the efforts of a few enterprising teams of developers, DeFi has gradually been growing on the ICON network as well, with significant projects launching in the first half of 2021.
Unfortunately, DeFi still remains an elusive — and somewhat frightening — concept for many. For most people, their only exposure to DeFi has been the number of negative headlines that hit blockchain media outlets over the Summer and Fall of 2020.
However, the power and utility of DeFi shouldn’t be overlooked, and a true understanding what DeFi can do not just for blockchain generally but ICON specifically can be empowering for individual ICONists and the ICON network as a whole.
That’s why I’ve written this guide — to take complete newbies to DeFi and get them up to speed. More importantly, it’s my goal that after going through this guide, you’ll be more than capable of reaping the benefits that DeFi specifically on ICON can provide (while also being aware of the very-real — but manageable — risks).
Here’s how this guide will work.
Throughout the rest of this introduction, we’ll start by taking a general view of what DeFi is trying to accomplish, and why it can be beneficial to the blockchain space as a whole.
Then, we’ll move into breaking down the various DeFi components that are either already built and running on ICON, or those that will be coming soon.
You’ll get the most out of this guide by reading it in it’s entire, in order. Some chapters will reference terms of concepts in prior chapters, so reading it uniformly will be most beneficial.
So let’s get started!
Centralized Finance vs. Decentralized Finance
The best analogy for decentralized finance would be — you guessed it, centralized finance. Or, more commonly “finance.” This term refers to the existing financial system as it exists today, and to a certain extent has existed for hundreds (or maybe even thousands) of years.
At the very core of finance is money. Whether that’s in the form of teeth, gold, or U.S. dollars, practically every human throughout time has used some sort of money to store value and exchange for goods and services.
These days, most money — more specifically, currency — is developed, produced, and controlled by governments, obviously making it very centralized.
Enter Bitcoin. If you’re reading this, you almost certainly know what Bitcoin is, so I won’t spend time explaining it.
Consider Bitcoin the decentralized currency in our emerging decentralized financial system.
But while Bitcoin can work as a currency, it doesn’t necessarily work as a currency within a decentralized finance system. That’s because of its limited technical capabilities from a programming perspective. Fortunately, we have Ethereum.
Ethereum has become the home base for the most notable DeFi projects due to its ability to build, deploy, and execute smart contracts. You can’t have a decentralized financial system without the technology to execute that system when there’s no centralized authority. Ethereum serves that purpose.
ETH is more appropriate to serve as the currency comparison. It’s the way value is exchanged throughout the Ethereum network and ecosystem.
Similarly, when it comes to DeFi on ICON, ICX serves as our currency.
Ok, so we have money. Now what?
Let’s look at the other tools we have in the traditional finance system.
Stable currency: While I alluded to money and currency above, what’s important to specify that what makes the financial system work is a currency that’s stable — meaning it’s value doesn’t fluctuate too dramatically in the short-term. ETH and ICX don’t quite fulfill this role in DeFi — but fortunately that’s why we have stablecoins, which we’ll dive into in the next section of this guide.
Exchanges: Exchanges are a mechanism for facilitating the orderly trading of currencies, equities (such as stocks), commodities, or other liquid assets. We’re all familiar with traditional cryptocurrency exchanges like Binance or Coinbase, but these are just as centralized as traditional finance exchanges like stock markets.
Fortunately, decentralized finance creates the ability to trade liquid assets without a centralized authority. Thanks to smart contracts, we have the ability to exchanges assets via either an automated market maker (AMM) such as Uniswap, or via a decentralized exchange.
Lending: One of the most critical elements of a healthy financial system is an abilitity to access credit and debt. In traditional finance, this task is usually performed by financial institutions such as banks and credit card companies. Those companies have the ability to deny individuals or businesses access to credit for any number of reasons, either due to their own internal standards or due to regulatory limitations.
Fortunately, decentralized finance offers the ability for anybody to offer or access credit, as long as they have funds to lend or collateral to offer in exchange for the right to borrow funds.
So why do we have all these tools? What value do they provide, and why are they necessary for a healthy, growing economy (either in a traditional or blockchain sense).
As mentioned, a stable currency is required to easily facilitate a transfer of value between two parties. An unstable currency — as most cryptocurrencies currently are — makes it harder to conduct transactions, due to the wild fluctuations of value.
The existence of exchanges allows for an easy and reliable exchange between two parties in a liquid market. Rather than being forced to hold onto an asset or currency when one would rather sell or buy the asset, an exchange allows for a better allocation of resources throughout an economy. If a person believes owning a stock is the best use of their money, they can now own a stock. If they’d prefer to have liquid currency instead of a stock, they can sell it easily. Without an exchange, they’d have to work hard to find a buyer (or seller) and a fair price for their transaction, or get stuck holding the asset. An exchange fixes this problem.
Meanwhile, lending allows credit to flow through the economic system. The availability of credit — the ability for people to borrow money — leads to the ability to purchase productive resources (such as land, labor, or a business), which helps grow the economy and expands economic activity. Typically, individuals borrow money in order to be able to do more than their current amount of money would allow them to do. Without credit, they won’t have the ability to conduct this economic activity. With credit, they can squeeze more out of what they have. Keep in mind this is a different type of debt than consumer debt, which is typically used in a far less productive manner.
All of these categories add important tools to our traditional finance system that allows for greater productivity and activity. So it’s no surprise that decentralized finance hopes to do the same thing.
Ultimately, what DeFi does is simply create a parallel financial industry — one that is decentralized without a centralized authority. The upside of this is expanded access to financial tools for those who may be shut out of the existing traditional financial system, along with the fact that you no longer have centralized entities that can interfere with transactions for any number of reasons. The downsides are the issues that come with blockchain technology, including smart contract failures and hacks.
When you look at the blockchain industry, what you will see is an effort to essentially build an entirely new economic structure on the blockchain. Bitcoin was the most simple form of this effort. As time has gone on, this project has grown more and more complex, with new tools and applications added regularly.
This is a similar case with ICON. While ICON’s core mission and technology is to provide interopability for enterprises, it’s also built in a manner that facilitates all sorts of activity. As time has gone forward, more and more people have been building projects on ICON while ICONLOOP continues to expand enterprise adoption.
The result is the beginnings of what could be a thriving economic system on the ICON network, but the key to maximizing that opportunity is the buildout of a functioning and powerful DeFi toolset. Fortunately, that effort is well underway.
While some of this may come off as fairly basic, I think these concepts are important to emhpasize. One of the issues I’ve encountered the most over time is a bit of a misunderstanding as it relates to DeFi.
Many are under the belief that DeFi is simply an overhyped concept that had it’s own price bubble during 2020, but will fade like other fads (sort of like the ICO boom in 2017). I’ve also seen some people express that ICON was getting into the DeFi game “too late”, because the hype had “left” the DeFi ecosystem.
These arguments ultimately miss the point of DeFi. What DeFi offers is a set of important tools that any blockchain project will need to succeed and grow over the long-term.
They’re tools that help facilitate building and developing on blockchains in a macro-economic sense (by providing extra resources and tools to developers and builders), but also provide an opportunity for individual token holders to extract more value from their own holdings in a productive manner.
As part of this series, I’ll explain how that works — at both the macro-level and micro-level.
And to round out this introduction , I encourage you to watch this brief and informative overview of DeFi from The Defiant:
So let’s get started!
If you’d like to ask questions about DeFi, discuss strategies, or just have a general discussion, please join us in the ICON DeFi Discussion group I’ve created on Telegram to supplement this guide and build a vibrant DeFi community around ICON.