Decentralized Finance or DeFi is an open sourced, permissionless and transparent ecosystem of financial applications that are built on top of blockchain networks. It is available to everyone and operates without any central authority. Users maintain full control over their assests and interact with this ecosystem through peer-to-peer (P2P), decentralized applications or DApps.
Traditional finance relies on institutions such as banks to act as intermediaries, and courts to provide arbitration.
DeFi applications do not need any intermediaries or arbitrators. The code specifies the resolution of every possible dispute, and the users maintain control over their funds at all times. This reduces the costs associated with providing and using these products and allows for a more frictionless financial system.
As these new financial services are deployed on top of blockchains, single points of failure are eliminated. The data is recorded on the blockchain and spread across thousands of nodes, making censorship or the potential shutdown of a service a complicated undertaking.
Another significant advantage of DeFi is easy access to financial services, especially for those who are isolated from the current financial system. Since the traditional financial system relies on the intermediaries making a profit, their services are typically absent from locations with low-income communities. However, with DeFi, the costs are significantly reduced, and low-income individuals can also benefit from a broader range of financial services.
Some of the Potential Use Cases for DeFi are:
– Borrowing & Lending
– Monetary banking services
– Decentralized Marketplaces
Most of the applications of Decentralized Finance involve the creation and execution of smart contracts. You can learn more about smart contracts in my video on What is a smart contract?
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And as always, this is not financial advice, I do not give financial advice, do your own research, I just like to talk about crypto.
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