The Role of the Ethereum Virtual Machine in Decentralized Finance

The Ethereum Virtual Machine (EVM) has been crucial to the development of decentralized finance (DeFi) and continually promotes its growth and innovation. The EVM is a platform that processes and executes smart contracts on the Ethereum network immutably and securely. It operates on a network of nodes, executing and syncing code without a central computer. 

Vitalki Buterin introduced Ethereum in 2013 as a decentralized platform for building applications. Its roots can be seen in BitTorrent, the file-sharing app that changed the way people shared and downloaded music in 2001. Buterin himself made the comparison, highlighting the difference between BitTorrent and the technology that had preceded it - namely that you would have to destroy every computer running BitTorrent to remove it from existence, rather than a single centralized computer. Although built for a different purpose, Buterin wanted to create something similar. Something that worked as a virtual machine, with no physical limits, and was accessible to all. 

Along with a team of others, Buterin created the Ethereum Virtual Machine and it was launched in 2015. Since then, EVM has been a drive behind the expansion of DeFi into the ecosystem we know today. 
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How has the EVM impacted DeFi

The EVM enables the execution of smart contracts - self-executing agreements with the terms written into the code. This is fundamental for DeFi applications, allowing complex financial transactions and operations without intermediaries, thereby increasing reach whilst lowering cost, time, and barriers to access.  
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Security. By operating on a decentralized network of nodes, EVM ensures smart contracts are executed consistently and securely. This decentralized network is crucial for the applications created on it, establishing and maintaining integrity and trustworthiness. Without a centralized network, there is no chance of a single entity controlling, altering, or deleting the execution of these contracts. 

Scalability. Scalability has both a negative and positive impact on EVM and DeFi. While EVM provides scalability for DeFi by allowing for growth and innovation, DeFi’s popularity has caused congestion on Ethereum’s network. The Proof-of-Stake consensus mechanism has vastly improved these congestion problems and has been utilized for Ethereum 2.0. Alongside PoS, Layer-2 solutions such as Optimistic Rollups and zk-Rollups also help alleviate these issues.  

Programmability. The EVM allows developers to create programmable smart contracts. This programmability means that anyone can work on DeFi applications such as decentralized exchanges, lending protocols, and synthetic assets. This open access creates more democratic access to these decentralized products and a more open global financial system. 

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Use cases of the EVM for DeFi

Here are some ways in which DeFi utilizes and has been improved by the EVM. 

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Decentralized Exchanges

EVM powers decentralized exchanges, where crypto trade is facilitated directly between users without relying on intermediaries. Smart controls handle the different aspects, including liquidity pools, trade matching, and fee distribution. These are executed transparently on the Ethereum blockchain, offering that extra layer of security for these exchanges. 

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Stablecoins‍

Stablecoins are widely used in DeFi to provide a stable medium of exchange and a store of value. The EVM manages the smart contracts for these stablecoins, ensuring that they are pegged to fiat currencies and are fully collateralized. 

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Governance and Decentralized Autonomous Organizations (DAOs)

EVM-based smart contracts implement decentralized governance for many DeFi protocols. These protocols allow token holders as part of DAOs to vote on proposals and participate in decision-making around a token. 

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NFT minting 

Non-fungible tokens are hugely popular in DeFi. Smart contracts are used to mint these NFTs with their unique value on the Ethereum blockchain. The EVM allows for the implementation of token standards, such as ERC-721 for non-fungible tokens. 

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EVM and DeFi

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The Ethereum Virtual Machine is integral to the DeFi ecosystem that we have today, and will be there to help develop it into the future. Its programmability, security, and scalability enhance the DeFi world and are at the heart of how we use DeFi. As scalability issues are solved with developments such as Ethereum 2.0 and Layer-2 solutions, EVM will be enhanced enough to support the ever-expanding uses of DeFi. As DeFi itself evolves, EVM will remain the backbone of growth, driving innovation and offering democratic access to individuals for control over their financial future. 

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