decentralized finance (dE-fi)
<> DeFi stands for “decentralized finance,” though it’s also known as “open finance.”
It’s a financial system in which middlemen are removed and, like most things associated with Web3, is a utopian vision of a financial system that operates without a central authority.
<> Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies.
<> The system removes the control banks and institutions have on money, financial products, and financial services.
Some of the key attractions of DeFi for many consumers are:
- It eliminates the fees that banks and other financial companies charge for using their services.
- You hold your money in a secure digital wallet instead of keeping it in a bank.
- Anyone with an internet connection can use it without needing approval.
- You can transfer funds in seconds and minutes anonymously.
Centralized Finance vs. Decentralized Finance?
Ways people are engaging with DeFi today
Users typically engage with DeFi via software called dapps (“decentralized apps”), most of which currently run on the Ethereum blockchain.
Unlike a conventional bank, there is no application to fill out or account to open.
Ethereum allows complete financial freedom – most products will never take custody of your funds, leaving you in control.
You can think of DeFi in layers:
- ) The blockchain – Ethereum contains the transaction history and state of accounts.
- ) The assets – ETH and the other tokens (currencies).
- ) The protocols – smart contracts that provide the functionality, for example a service that allows for decentralized lending of assets.
- ) The applications – the products we use to manage and access the protocols.
Ethereum is the perfect foundation for DeFi for a number of reasons:
Lending: Lend out your crypto and earn interest and rewards every minute – not once per month.
Getting a loan: Obtain a loan instantly without filling in paperwork, including extremely short-term “flash loans” that traditional financial institutions don’t offer.
Trading: Make peer-to-peer trades of certain crypto assets — as if you could buy and sell stocks without any kind of brokerage.
Buying derivatives: Make long or short bets on certain assets. Think of these as the crypto version of stock options or futures contracts.
- Tokens and cryptocurrency are built into Ethereum, a shared ledger – keeping track of transactions and ownership is kinda Ethereum’s thing.