What is DeFi?
Decentralized finance or DeFi is often called “open finance”. It utilizes protocols, digital assets, smart contracts, and decentralized applications (dApps), most commonly housed on the Ethereum blockchain, to build a financial platform that’s open to everyone. DeFi aims to remove all of the middlemen from traditional financial instruments, e.g. savings, lending, trading, insurance, etc. DeFi has become the most active field within the blockchain space, providing a wide range of use cases for individuals, developers, and institutions.
“DeFi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.” – Coindesk
How does DeFi work?
Although DeFi utilizes multiple blockchains, it’s closely tied to Ethereum and the cryptocurrencies that leverage it. This is because Ethereum is designed to be more of an infrastructure, allowing developers to build decentralized applications or dApps on top of it and to encode these self-adjusting “smart contracts” to work on the network. This is why it’s often referred to as the “backbone of the DeFi network.”
What are the benefits of decentralized finance?
Smart contracts and dApps are highly programmable, which allows for low-cost financial services.
The blockchain is permissionless, meaning anyone with a crypto wallet and an internet connection—regardless of their geography and often without any minimum amount of funds required—can access DeFi applications.
Records are not stored on a single server or central network.
With DeFi, developers and product teams can flexibly build on existing protocols, customize interfaces and integrate third-party applications. This is why people often refer to DeFi protocols as “Money Legos.”
Transparent and Trustless
On the public Ethereum blockchain, every transaction is broadcast to and verified by other users on the network. Ethereum and the DeFi protocols running on it are also built with open source code that is available for anyone to view, audit, and build upon.
Because there is no middleman involved to charge fees in order to cover their overhead or make a profit, DeFi services are often cheaper to use and/or distribute a larger portion of the returns to its users.
Traditional finance takes ownership of your assets and credits an account balance to the customer. However, in DeFi, through the use of smart contracts, the user always maintains ownership and control over their assets.
Unlike traditional financial markets that close after 5 pm (and weekends and holidays), DeFi is available 24 hours a day, 7 days a week, and 365 days per year.
Common DeFi applications With all of these capabilities available to the network, there’s no shortage of applications for DeFi. From decentralized exchanges (DEX for short) to lending, savings, and commerce, DeFi offers a way to engage the financial ecosystem with peer-to-peer ease. For financial professionals who want to learn more about these applications, check out our Academy—it’s free and filled with useful information on digital assets you can use to answer all your client’s questions.