What is DeFi (Decentralized Finance)?

1. What is DeFi (Decentralized Finance)? Decentralized finance, or also known as DeFi, is one of the most popular things in the blockchain and crypto space. Fundamentally, decentralized finance takes existing financial products and services such as trading, lending, and borrowing, and puts them on the blockchain. By moving these financial products and services on the blockchain, the central authority is removed from the equation.

2. But not all of these financial services offered on the blockchain are entirely decentralized. Some of them are still offered by centralized companies. These centralized companies are operating on smart contracts so that they can offer it on the blockchain. However, these centralized companies still don’t have much control and impact over your funds, compared to the traditional centralized authorities, like banks and governments.  • Some suggest that decentralized finance should be called “non-custodial” finance as it is a more accurate term. Non-custodial means that you still hold the keys to your crypto, not needing to hand them over to any intermediaries. With DeFi, you have complete control over your crypto while your transactions are being carried out through smart contracts.

3. Understanding decentralized finance • Decentralized finance, sometimes called open finance, is a blanket term for financial services such as lending and borrowing, created using decentralized infrastructure, such as smart contracts and blockchains. In 2019, it has quickly emerged as Ethereum’s next big use case after Initial Coin Offerings in 2017. ICOs were the tokens being sold to raise funds for blockchain projects.  • According to a report published by Jubilee Group’s JENCO, a decentralized platform, “utilizing DeFi is more beneficial since users do not have to follow centralized rules. Direct, peer-to-peer exchanges can occur, given that various values are agreed upon irrespective of the current offline values. Dealers or third-party mediators can also be utilized. However, transactional prices are significantly lower than when using traditional and offline institutions.” • By using decentralized technology such as smart contracts, DeFi allows the elimination of middlemen. This is because smart contracts are self-executing contracts made of computer code. So for example, instead of depositing your money to a bank where authority is keeping your money safe, with DeFi, you are in complete control of your money. Whatever you have is with you. You won’t need to worry if someone might lose your money.

4. How decentralized finance works • Decentralized services are created on the Etherium (ETH) blockchain, where financial services are accomplished by smart contracts. But what do smart contracts do? Here are some of them:  • Removes any intermediaries or middlemen from the equation. This means that transaction costs and fees will be lower. It will also lessen any delays in a financial transaction. With smart contracts, it is possible for parties to exchange anything of value without needing to go to a centralized institution.  • Solves the trust issue. In financial exchanges, there’s always a question of trust between parties. Someone must always take the first step, but this means that they are putting themselves at risk. Smart contracts fix this problem by only executing once all parties have done their part.  • Allows custom rule criteria. Smart contracts transactions are programmable. Users can create transactions that can only be completed if all the preset rules are fulfilled.  • Transactions are more transparent and secure. With smart contracts, the level of transparency is increased. Because of that, it is easier to trust other parties involved in transactions. All transactions carried out by smart contracts are recorded on the blockchain. 

5. Conclusion Decentralized finance can possibly solve the current challenges in the financial system, giving the power back to the people by creating a more accessible, efficient, and transparent system. This is an exciting development for the blockchain space that can bring financial products and services to anyone, anywhere in the world.