DeFi, short for decentralized finance, is an anonymous system that completes traditional financial transactions without any use of, or interference from, an intermediary or governing body. DeFi uses an application through blockchain technology, known as DeFi protocol ,rather than using a neutral third party. DeFi protocol is to connect users directly, and in order to maintain fulfillment of these agreements, there are smart contracts and products. Ethereum is the most popular and accessible blockchain used for DeFi.
What is a smart contract?
Smart contracts are what make it possible for users to create DeFi apps on the blockchain. These contracts are transactional protocols or computer programs that will automatically perform when relevant events tied to the agreement occur. A key thing to note is that Ethereum was coded with smart contracts in mind, which is why the blockchain is so closely related to DeFi.
Importance of DeFi
DeFi is a transition in society away from traditional finance. DeFi is a fundamental shift in how we interact with forms of currency. Oftentimes, there are third parties involved in finances. There’s traditional banks and exchanges we use to digitally transfer fiat currency. These processes can be time consuming and even expensive when they involve transaction fees. DeFi on the other hand, doesn’t have the inconveniences or vulnerabilities we are used to.
How does DeFi differ from traditional finance?
Traditional finance is highly regulated, and there’s often a frequent amount of fees.
- Much higher levels of autonomy with transactions; no permissions are needed to conduct transactions and deals can be structured without waiting periods
- Better transparency into transactions and fees
- Greater trust in the technology itself as opposed to intermediaries like banking institutions
However, these perks don’t come without potential risk. DeFi is still new territory, and it’s also less private since transactions are visible on the public decentralized blockchain.
What are DeFi applications?
Decentralized finance already includes dozens of different financial applications. The only limit to what DeFi could accomplish is how well the smart contract is crafted.
Some of the most significant modern DeFi services and decentralized applications are:
- Liquidity, mining, and staking
- Borrowing, lending, and saving
For further information on the topic of DeFi, check out our Blog post: What is DeFi and How Does It Work?
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