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Updated Jan 2022

DeFi Primer

by Hashdex Research
42 min read
44 pages

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In recent decades, the world has witnessed one of the greatest periods of economic growth in human history, and it is no exaggeration to say that capital markets played a fundamental role in that development. It is through a well-developed financial market that economic resources can be efficiently allocated, reaching the people, projects and companies that can bring the greatest value to society.

A key role of financial organization in this context is that of a trusted intermediary, an institution people trust to deposit their capital with the expectation that it will be deployed in a safe and prudent way. The progress this model has brought to society is undeniable, but it is not without drawbacks. Until recently, some degree of centralization was inevitable in an environment where trust is an essential attribute. After all, the largest and strongest institutions are likely to be the most in demand, attracting even more capital.

There are pitfalls in such concentration, however. As institutions grow larger, some relevant issues arise: operational complexity increases, reducing speed and flexibility; smaller clients may no longer be economically interesting, overlooked in comparison to larger and more profitable ones; and fees usually get higher, as market power increases. Additionally, there are no clear incentives for one institution to cooperate with their competitors, making the sector fragmented. In other words, the system becomes more costly and inefficient.

Now imagine that instead of having to rely on trusted intermediaries, we could establish a global, transparent, interoperable and — most of all — trustless network, in which we could transact, invest and manage our money in a completely decentralized way? That’s the innovation that Decentralized Finance (DeFi) brings to the global financial markets landscape.

© 2023 Hashdex Asset Management Ltd.
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