Blockchain in finance - from Initial Coin Offering (ICO) to Decentralized Finance (DeFi)

Editor’s note (August 2026): I first published this article in June 2021 and refreshed it in August 2026. The original examples have been kept, and what has happened since has been added.

In the first 12 years of blockchain history, since Bitcoin was born in 2009, people have been on a persistent quest for killer applications of blockchain beyond Bitcoin’s electronic payment. Newer blockchains such as Ethereum paved the way for blockchain to support a wider range of use cases. Blockchain in the financial services domain has so far received the most attention.

As we review blockchain in finance, we can clearly see two major milestones. The first one is the Initial Coin Offering (ICO) boom during 2017-2018; the second one is the Decentralized Finance (DeFi) movement that saw exponential growth throughout 2020 and kept its accelerated momentum into 2021.

Given Bitcoin’s status as the first and dominant crypto asset in the entire blockchain space, it is unsurprising to find that both the ICO and DeFi timelines coincide with the two biggest Bitcoin price bull runs up to that point.

Figure 1. Bitcoin price chart until June 2021

As shown in Figure 1, the Bitcoin price chart courtesy of Yahoo! Finance, the first major Bitcoin bull run topped at nearly $20K at the end of 2017. That is when the ICO boom was also near its peak. The subsequent Bitcoin bull run saw a top at over $60K in April 2021, when DeFi was in a frenzied state. The Bitcoin price had dropped to nearly half after that top and was still in uncertain territory in June 2021. But the DeFi sector continued to progress rapidly. Bitcoin then went through another full cycle, bottoming below $20K in late 2022 and then crossing $100K for the first time in December 2024. The pattern of “a finance use case booms alongside a Bitcoin bull run” has held each time, even as the use case changes.

Now let us look at ICO and DeFi in more detail.

The Initial Coin Offering (ICO) Boom - exposing Bitcoin to the mass for the first time

Initial Coin Offering (ICO)

Bitcoin and blockchain stayed a niche phenomenon unknown to most of the general public for many years after it was born in the late 2000s. Even for the small group of people who had heard about it, the non-trivial technical knowledge required to access Bitcoin was a big hurdle to overcome.

But people deep in the Bitcoin circle continued the development, including creating separate blockchains by tweaking the parameters of the original Bitcoin blockchain or adding new functionalities. Many tried to explore different use cases with blockchain. One of the applications that eventually exploded and attracted mass mainstream media attention is called Initial Coin Offering (ICO).

The term ICO originates from another more familiar term, Initial Public Offering (IPO). IPO is used by public companies to raise funds from the general public by offering them stocks or securities. The IPO process typically involves financial institutions as underwriters and is executed through a regulated stock exchange.

The idea of ICO is to directly raise funding through the blockchain, removing the traditional financial underwriters and stock exchanges. Just like the Bitcoin blockchain has its Bitcoin, other blockchain projects can create their own native “coins”. People also use the more general terms “token” or “crypto token” to refer to the “coin” created on the blockchains. Regardless of which term is used, they mean the same thing - a digital representation of a certain value tied to the blockchain it is issued through. The name “coin” emphasizes more about monetary values, while “token” can mean more general utility values. When an investor participates in the ICO, they receive specific crypto tokens instead of receiving stocks of a public company as in an IPO.

As an example, Ethereum is a blockchain different from the Bitcoin blockchain. It raised funds through an ICO in 2014. Ethereum’s own history records that the sale raised 31,000 BTC, worth about $18M at the time. The investors sent Bitcoins to the project development team and in return, they received the Ethereum blockchain’s native token called Ether. Ether can be used to pay the processing fees for conducting transactions on the Ethereum network. Ethereum is a general-purpose blockchain and allows other developers to create various applications on it, without the need to create a new blockchain for each new application. Ethereum further makes it easy for each application to issue its own application-specific tokens. That functionality opened the gate for these applications to conduct their own ICOs directly on the Ethereum network. That allows the application to collect investors’ Ether in exchange for whatever token the application issues by itself.

The lowered barrier of entry for teams to conduct ICOs, coupled with the vacuum of regulation unlike in the IPO case, gradually drove the ICO phenomenon to an insane level. At the height of the ICO frenzy, the total ICO amount reached $4B in 2017, and then another $6.3B in the first quarter of 2018 alone - those were the press figures at the time; a fuller accounting by PwC and the Crypto Valley Association later put 2017 at roughly $7B across 552 ICOs and the first five months of 2018 at $13.7B across 537, so if anything the boom was bigger than it looked from inside it. As could be expected, a large number of low-quality projects emerged. Many of them managed to collect a large amount of crypto funds using simply a whitepaper without any real execution plan. Then the tide started to change direction. The US Securities and Exchange Commission (SEC) had already concluded in its July 2017 DAO report that tokens resembling “securities” must be registered, or qualify for an exemption, before being offered. Eventually, the ICO craze started to fade as Bitcoin entered a bear market in 2018; the same industry report series counted a sharp decline in the second half of 2018.

Fast forward to 2021, the overall number of ICOs had seen a large reduction but many new variations of ICO also appeared. For example, Initial Exchange Offering (IEO) uses a bit of a hybrid approach, where a crypto trading exchange is enlisted to help sell the tokens (the SEC issued a specific investor alert about IEOs in early 2020). Initial DEX Offering (IDO) is similar to IEO but uses a different type of exchange called a Decentralized Exchange, a term we will cover later in the DeFi section. The regulatory picture has kept evolving since: in March 2026 the SEC and CFTC jointly issued an interpretation setting out when a crypto asset that is not itself a security can still be sold as part of an investment contract - essentially codifying the line the 2017 DAO report had drawn - and the European Union’s MiCA regulation now sets explicit rules for public token offers. The “vacuum of regulation” that fueled 2017 is largely gone.

From the public’s perspective, the most significant impact of the ICO frenzy, along with the 2017 Bitcoin bull run, is probably the extensive mainstream media coverage at that time that exposed a lot more people to the names of Bitcoin (and blockchain) for the very first time.

Figure 2. Google Trend Search Interest for the term “Bitcoin”

Figure 2, taken from Google Trends in June 2021, shows the worldwide search interest for “Bitcoin” since 2004. The incredible level of public interest in Bitcoin in December 2017 can be seen at the peak of the highest spike. Notably, even when the 2021 bull run propelled the Bitcoin price to three times its high of 2017 (over $60K vs. $20K), the “Bitcoin” search popularity was only around 64% that of the 2017 peak! One plausible hypothesis is that many people had already known Bitcoin since 2017, so they no longer needed to do a basic search for the term.

Decentralized Finance (DeFi) - blockchain frenzy extending to the roaring 2020s

Decentralized Finance (DeFi)

What is Decentralized Finance (DeFi)? DeFi could be a term for all financial applications that remove the financial intermediaries. In that sense, ICO is also a subset of DeFi because it removes the securities exchange which normally serves as the intermediary for an initial securities offering. However, here we will adopt the more commonly used definition, referring DeFi to the broad range of new financial applications - trading, lending, borrowing, and investing on blockchains - that flourished primarily after the ICO craze. One caveat is worth stating up front: how decentralized these applications actually are varies widely, a point we will return to in the conclusion.

The notion of DeFi actually started to get real traction around late 2019. The DeFi space exploded in 2020 and continued its accelerated momentum into 2021. The market cap of DeFi hit an all-time high of over $140B in early May 2021, seen in Figure 3 courtesy of CoinGecko. That represented an over 7-fold increase since the beginning of 2021 alone. This number subsequently dropped along with the Bitcoin price itself.

Figure 3. DeFi Market Cap

To put the 2021 snapshot in perspective, a better long-run yardstick than token market cap is total value locked (TVL) - the value of assets actually deposited in DeFi protocols. By DefiLlama’s count, TVL across all chains went from about $0.6B at the end of 2019 to $15B at the end of 2020, roughly $122B in May 2021, and a peak near $177B in November 2021. It then fell to about $54B in the 2022 bear market and stood at roughly $85B in August 2026. In other words, the “explosion” was real, the subsequent contraction was severe, and the sector settled at a level far above where it started.

Decentralized Lending and borrowing

Just like Bitcoin made decentralized payment possible, DeFi is making all types of financial services possible without involving financial institution intermediaries. Let us use the lending and borrowing service as an example to see how DeFi works.

In the traditional banking service, the lender and borrower both transact through the bank, which acts as a trusted third party. In the DeFi world, the bank is gone. It is instead replaced by a smart contract implementing the banking service. A smart contract is basically computer code that defines the specific use case. The code is typically run on a compatible blockchain such as Ethereum to execute the transactions in a decentralized fashion (more background about the smart contracts can be found in our gentle introduction to blockchain). In the DeFi world, people commonly refer to a smart contract as a “protocol” - reflecting the fact that it boils down to a specification of rules for the use case.

One of the most well-known DeFi lending and borrowing protocols is called “Compound”. Built on the Ethereum blockchain, Compound connects the lending and borrowing parties and enables them to lend or borrow different types of crypto tokens directly. Here is how it works in a nutshell, as laid out in its original whitepaper. First, lenders send their lending assets in crypto tokens to the Compound protocol. Compound consolidates all the crypto tokens deposited by lenders into a huge liquidity pool. The lenders are therefore also called liquidity providers. Borrowers then borrow crypto tokens directly from the liquidity pool and pay interest on it. The interest borrowers pay is then shared by the liquidity providers. The specific interest rate for lending and borrowing is automatically adjusted using a mathematical formula based on the real-time supply and demand of the assets in the liquidity pool (more precisely, on the pool’s utilization, with the formula’s parameters set by governance).

It is worth noting that in order to borrow, the borrowers are required to put up some crypto tokens as collateral first. Due to the usually high price volatility of crypto tokens, the value of the crypto token collateral required is typically much higher than the value of the crypto tokens borrowed. In Compound’s original design, the collateral also entered the liquidity pool. As a result, borrowers themselves also became liquidity providers. Since interest accumulated in the liquidity pool is distributed to all liquidity providers, borrowers themselves also earned part of it. This led to an interesting situation where the interest received from the collateral the borrower put in could sometimes exceed the interest the borrower paid for the borrowed assets. In those situations, the borrower was effectively getting paid for borrowing! That curiosity did not survive the protocol’s next version: Compound III, launched in 2022, lets users supply collateral only to borrow a single designated “base” asset, and collateral no longer earns interest. The design traded away some of the elegance of one big pool for cleaner risk management - a recurring trade-off in DeFi’s maturation.

To summarize, the core of what the lending and borrowing smart contract implements is a liquidity pool that replaced the traditional bank. The blockchain mechanism ensures that the liquidity pool provides a trustless, decentralized transaction environment where users including lenders and borrowers can both interact with the liquidity pool directly.

Decentralized Exchanges (DEX)

While today there are tons of DeFi applications available, knowing the concept of the liquidity pool in the lending and borrowing case makes it much easier for us to understand the gist of a majority of other DeFi applications. Let us look at another prominent DeFi service - crypto token exchanges. They are increasingly popular due to the large number of different crypto tokens that have been created by many DeFi protocols.

Early crypto token exchange services resemble the traditional stock exchange model. In such a model, the exchange is a centralized venue. It keeps an order book. Buyers and sellers can transact only if there is a price match between the two parties.

The arrival of DeFi changed the landscape and led to the birth of the Decentralized Exchange (DEX). If we think about the role of the liquidity pool in the Compound protocol, we can find that it automatically connects the lender and borrower, enabling lending and borrowing transactions. If we apply the same concept to the exchange, we can also automatically connect the exchange’s buyers and sellers. The centralized order book is no longer required. In DeFi terminology, such a pool-based pricing mechanism is called an Automated Market Maker (AMM). AMM is a remarkable invention that enabled truly decentralized exchange.

A representative decentralized exchange based on AMM is called the “Uniswap” protocol. However, providing liquidity to an exchange pool like in Uniswap has some important differences from providing liquidity to a lending and borrowing pool like in Compound. Liquidity providers for a lending and borrowing pool usually supply one type of asset at a time. But liquidity providers for an exchange pool are usually required to contribute a pair of crypto assets together so that the two assets can be exchanged. For example, Alice may pair $1K worth of crypto token A and $1K worth of crypto token B and deposit them into the exchange’s liquidity pool. Other liquidity providers may do the same. Users of the exchange can then interact with this liquidity pool to buy token A with token B or vice versa. The price of the purchase is set by the liquidity pool dynamically based on the supply and demand of those tokens in the pool - in Uniswap v2, the version described here, by a simple constant-product formula. This way, users of the exchange are again dealing directly with the liquidity pool created by a smart contract. To encourage people to provide liquidity, the decentralized exchange usually charges a small usage fee (0.30% per trade in v2) and passes it to the liquidity providers as incentives. However, providing crypto token liquidity pairs to decentralized exchanges could also suffer so-called “impermanent loss”, which occurs when the relative value of the underlying crypto token pair fluctuates and the provider ends up worse off than if they had simply held the two tokens. The AMM idea has kept developing since: Uniswap v3 (2021) let providers concentrate their liquidity in a price range instead of spreading it across all prices, and Uniswap v4, live since January 2025, adds “hooks” that let developers customize pool, fee, and swap logic. The two-token-pool picture above is still the right mental model; the real thing has just grown more knobs.

Governance in DeFi

Another innovative DeFi feature allows the liquidity providers to not only earn transaction-associated rewards but also participate in the governance of the DeFi protocol. What do we mean by the governance of the DeFi protocol? Recall that a DeFi protocol specifies the rules of the financial service it supports. Over time, there may be different aspects of these services that need to be updated. For instance, should a lending platform support a new type of crypto token B in addition to the token A that is currently supported? Should a decentralized exchange increase its transaction fee from 1% to 3% to attract more liquidity providers, but at the potential cost of losing users due to the higher fees? These are the type of governance decisions.

DeFi teams may issue a special type of token called governance tokens. Holders of these governance tokens receive proportional rights to vote for governance decisions of the protocol. There could be various ways to determine how these governance tokens should be distributed. On one hand, in services like lending and borrowing or exchange services where liquidity providers are indispensable, it is appropriate to distribute governance tokens to the liquidity providers in proportion to the amount of liquidity they contributed to the platform. On the other hand, customers of any platform are certainly critical as well. The protocol could reward users with the governance token based on measures of their loyalty, e.g., the length of time they have used the service. These governance token distribution mechanisms aim to align the interests of stakeholders and platform developers, creating a positive loop for the platform’s sustainable growth - though as the yield-farming section below and the record since have shown, handing out tokens creates participation more reliably than it creates loyalty. Compound was not the first DeFi protocol to issue a governance token - MakerDAO’s MKR holders were already voting on protocol parameters in 2019. What Compound did in June 2020 with COMP was to distribute its governance token to users and liquidity providers as a reward for using the protocol, and that model is what caught on. Uniswap followed in September 2020 with UNI, airdropping a share to everyone who had ever used the protocol, and numerous other protocols have since issued their own governance tokens.

Yield Farming in DeFi

As we have seen in various use cases, liquidity providers lend out their crypto tokens to the DeFi protocol. In return, they get rewarded with crypto tokens from the financial transactions that the DeFi protocol supports - such as interest earnings in lending transactions and transaction fees in the crypto exchange. They also have the opportunity to earn governance crypto tokens if the protocol offers them. In DeFi, there is a special term describing the process of using crypto tokens to earn additional crypto tokens called “Yield Farming”. People who practice yield farming are known as “Yield Farmers”. Since there is an increasing number of platforms offering these yield farming opportunities, many yield farmers create strategies to move their crypto assets among different platforms from time to time to maximize the yield they can earn across the platforms. The summer of 2020, when COMP rewards kicked this off, is still remembered as “DeFi summer”. The strategies that chase the highest yields usually involve leverage, stacking one protocol’s tokens as collateral in another, which multiplies both the smart-contract risk and the chance of being liquidated when prices move. Much of the headline yield was also simply newly printed governance tokens, which is why so many of those yields fell to near zero once the emissions slowed.

Connecting DeFi with the real-world assets

The liquidity pool and AMMs provided a cornerstone for numerous DeFi protocols supporting asset exchanges. But if they are only for crypto assets that are isolated from the real world, the usage is still extremely limited. For DeFi to really enter the mainstream, it has to bridge from the pure crypto space to the non-crypto world, i.e., supporting fiat currency and real-world assets. The creation of stablecoins and synthetic assets addressed the gap between assets in the crypto space and the real world.

Fiat-backed centralized stablecoins

A stablecoin is a crypto token whose value is pegged to the value of a fiat currency or other stable assets. USDC (USD Coin) is an example of a stablecoin that ties its value to the US dollar. To keep one USDC’s value always close to one dollar, a new USDC is only issued after one additional US dollar of assets is secured - per Circle’s terms, one US dollar or an equivalent amount of US-dollar-denominated assets such as short-term Treasuries. For that reason, this type of stablecoin is called a fiat-collateralized stablecoin. These stablecoins essentially create a digital token representation of their collateralized fiat currency. In other words, it turns fiat currency into a crypto token that can be used like any other native crypto token in the DeFi world. In addition, they also address the concern that keeps many people away from the DeFi space - the high volatility of the value of most crypto tokens.

It is worth pointing out that even though these fiat-collateralized stablecoins are meant to facilitate the adoption of DeFi, many people consider the process that issues these stablecoins against the true decentralized spirit. This is because we have to trust the issuer of these stablecoins that they indeed have the same amount of collateral set aside as they promised. Although the issuer typically publishes reports about the reserves backing the stablecoins issued - Circle publishes monthly third-party assurance reports, which is not quite the same thing as a full audit - they are still making themselves a trusted intermediary in this process like in traditional finance. In other words, these coins can be considered centralized stablecoins for the decentralized world. In extreme cases, the issuer also has the ability to prevent a specific user from using these stablecoins; USDC’s contract code includes exactly such a blacklist function. The trust-the-issuer point stopped being theoretical in March 2023, when Silicon Valley Bank failed with $3.3B of USDC’s reserves on deposit and USDC briefly traded well below a dollar until the US government guaranteed the bank’s deposits. The peg held, but only because a traditional-finance backstop did. Stablecoins have since become the most regulated corner of crypto: the United States passed a dedicated federal stablecoin law, the GENIUS Act, in July 2025, setting reserve and disclosure requirements for exactly this category.

Crypto asset-backed de-centralized stablecoins

People who adhere to a fully decentralized mentality prefer the truly decentralized version of stablecoins. That means we have to remove the third-party intermediary holding the fiat collateral. One natural way to achieve that is to move the collateral from the fiat world onto the blockchain! That is the idea behind crypto asset-backed stablecoins.

A well-known stablecoin of this category is the US dollar-pegged DAI. DAI can be generated through a smart contract system called the “Maker” protocol, which in turn is governed by its governance token holders. Therefore, no central entity is involved in the issuance process. To mint DAI, the platform needs to first receive another crypto asset such as Ethereum’s Ether as collateral from a collateral provider, who locks it in a “vault”. Due to the crypto tokens’ high price volatility, DAI requires over-collateralization. That means the required value of crypto token collateral is much larger than the value of DAI minted, e.g., the original Ether vault type required at least 1.5 dollars of Ether to generate one DAI worth one dollar; the exact ratio varies by collateral type and is set by governance. If the collateral’s value falls too close to the debt, the vault is liquidated.

The Maker protocol also prices the act of minting: vault owners who mint DAI pay a “stability fee” on their outstanding debt, like interest on a loan. Governance uses that fee as one lever on the peg. If DAI trades below a dollar, raising the fee makes it more expensive to keep DAI outstanding, so vault owners buy DAI to repay their debt, shrinking supply and pushing the price back up; if DAI trades above a dollar, lowering the fee encourages more minting. There is a separate “DAI Savings Rate” paid to people who deposit DAI into its savings contract, which works on the demand side (a lever that sat at roughly 0% through 2021). In practice the peg is held by the combination of these rates, liquidations, arbitrage, and - since 2020 - a module that lets anyone swap USDC for DAI at one-to-one minus a small fee, which quietly means a good chunk of DAI’s backing is a centralized stablecoin after all. Maker has also changed a great deal since 2021: in 2024 the project rebranded as Sky, introduced an upgraded stablecoin USDS that DAI can be converted into one-to-one, and migrated its governance token from MKR to SKY, completing that in May 2025. Its collateral now also includes tokenized real-world assets such as Treasury bills, which is a long way from the purely on-chain ideal that started it.

Non-collateralized algorithmic de-centralized stablecoins

While crypto asset-backed stablecoins can be truly decentralized, they also have their shortcomings. For instance, the over-collateralization in the DAI stablecoin is clearly not capital efficient. So can we do it differently? It is actually possible to create a decentralized stablecoin only using partial collateral or even without using any collateral. While this idea might sound radical, it is not irrational at all. Recall that our world has long abandoned the “gold standard”, which links the currency of a country directly to its gold reserves. Nowadays we are already using fiat money from our central banks knowing it is not backed by anything other than our trust in the government. The value of our fiat currency fluctuates depending on its demand and supply.

Following the same logic, we can design so-called algorithmic stablecoins that create and maintain their value purely based on supply and demand. For a US dollar-pegged algorithmic stablecoin, if its value is worth more than one US dollar, then its supply is increased to reduce the value back to one US dollar; if it is worth less than one US dollar, then its supply is decreased to bring its value higher back to one US dollar. There were many different algorithmic stablecoin protocols in the market in 2021 that all used different methods to achieve supply-demand adjustment, with various levels of efficacy. In reality, designing an algorithmic stablecoin that can truly remain stable may require consideration of not only technical, but also social, psychological, and many other factors.

That last sentence turned out to be an understatement. The largest algorithmic stablecoin, Terra’s UST - which had reached a market capitalization of about $18 billion - lost its peg in May 2022 and collapsed to near zero within days, taking its sister token LUNA with it. Its supply-adjustment mechanism worked by minting and burning LUNA; once confidence broke, the mechanism printed LUNA into a death spiral instead of restoring the peg. The aftermath ran through the courts: the SEC won a civil fraud verdict in 2024 with Terraform agreeing to wind down, and founder Do Kwon pleaded guilty to fraud in August 2025. The fiat-currency analogy I offered above also deserves a caveat: a government’s money is backed by its power to tax and by legal-tender status, and an algorithm has neither. The idea of a capital-efficient decentralized stablecoin has not died - people are still working on partially collateralized designs - but “not irrational” now comes with an expensive footnote.

Synthetic crypto assets - bringing the real world to DeFi

If stablecoins link the crypto tokens and the fiat currency, then synthetic crypto assets bridge crypto tokens with the rest of the assets in the real world. Synthetic crypto assets are like crypto derivatives. Derivatives are financial instruments whose price is based on another asset, in this case, the real-world assets that the crypto asset represents. The “Synthetix” protocol is an example DeFi service that provided such a service. In its earlier design, it allowed people to use crypto collateral to mint synthetic crypto assets (“Synths”). These synthetic assets tracked the price of all kinds of real-world assets such as commodities and currencies via price oracles. For instance, with a synthetic gold crypto token, the price of the synthetic gold token follows the actual price of gold - not perfectly, since it depends on the oracle feed and on there being enough liquidity, but closely. We can then buy or sell it without actually owning gold, though also without any of the rights that come with owning gold. This effectively opens DeFi to a much wider world of assets. Synthetix itself has since changed shape considerably: in 2025 it shut down its layer-2 deployments and closed the legacy Synth pools, and as of 2026 its product is perpetual futures on Ethereum mainnet. The idea of synthetic exposure on-chain survived; that specific product did not.

Conclusions

Since the birth of Bitcoin, financial applications have been at the forefront of the blockchain space. We have seen two major milestones for blockchain in finance. The first is the ICO boom around 2017-2018. The second is the DeFi movement throughout 2020 and continued in 2021. These timings coincide with the two biggest Bitcoin price bull runs up to that point, which is not surprising.

ICO is used mostly by blockchain project development teams to raise funds directly from investors without involving a securities exchange. The spectrum of DeFi is much broader and really expanded to services that are more likely to be used by everyday people. We introduced the liquidity provider and AMM concept, which is a cornerstone for a wide range of DeFi applications serving the exchange of assets. We also looked at the key innovations that filled the gap between assets of the crypto space and those of the real world including stablecoins and synthetic crypto assets.

All the real DeFi applications exhibit a list of common features: their services are defined in smart contract code and the transaction execution is transparent and immutable, ensured by the blockchain. Since no third-party intermediary is involved, the transactions can happen much faster and more efficiently, and the cost can be more affordable. For the same reason, DeFi services are also more accessible, and can be made available to anyone, anywhere who can access the Internet. There is no minimum transaction amount required, significantly improving the inclusiveness of the services as well. Each of those deserves a qualifier. “Immutable” code is often upgradeable by governance or an admin key; “no intermediary” usually means intermediaries were redistributed - to governance, oracles, front-end operators, and stablecoin issuers - rather than eliminated; “cheaper and faster” depends entirely on network congestion, with Ethereum fees during the 2021 peak making small transactions uneconomical; and “anyone, anywhere” is true of the contracts but not always of the websites people use to reach them, which increasingly apply geographic and sanctions restrictions. The promise is still real. It is just narrower than the early enthusiasm made it sound.

All the good things about DeFi being said, we cannot emphasize enough the extremely high risk of DeFi services at the early stage of their development. As of June 2021, DeFi was still pretty much a wild west. Regulations were from minimal to non-existent as numerous different types of DeFi protocols popped up almost every day, everywhere. It was very exciting to see a lot of true innovations taking place rapidly in the space, but it was also quite concerning to witness frequent security breaches or service vulnerabilities that had cost DeFi users tens to even hundreds of millions of dollars. Both halves of that sentence got worse before they got better. The single biggest DeFi theft came nine months later, when the Ronin bridge behind the game Axie Infinity was drained of 173,600 ETH and 25.5M USDC - north of half a billion dollars at the time. And the wild west is being fenced: the EU’s MiCA regime is in force, the Financial Stability Board has published policy recommendations for DeFi, and the US now has its stablecoin law. Therefore, careful research and prudent risk management remain a must for anyone who is interested in getting into DeFi - the risks have simply become better named: smart-contract bugs, admin keys, oracle failures, bridge hacks, leverage and liquidation, and issuer or reserve failure.

Note: this article is part of my Introduction to Blockchain, Crypto, Metaverse and Web3: Beyond the Hype. You may find the rest of the articles in the series here.