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What is DeFi?

September 21, 2021

4m

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Decentralized Finance is a cornerstone of the crypto world that rose in popularity during the first quarter of 2020 and propelled in value shortly after the great March stock market crash. Within the span of a year, DeFi went from holding only $800M in collateralized value to $46B. At the time of writing, the market has a record high of $88B but oscillates between $50B and $65B.


The question is: What is DeFi? Simply put, decentralized finance is a segment of the cryptocurrency market that focuses on converting traditional financial instruments into decentralized products and services. The list includes:

  • Loans
  • Yield instruments
  • Derivatives
  • Insurance
  • Perpetuals
  • P2P payment networks

And much more!

DeFi derives its value from offering its services in a decentralized manner. Users are not subject to regulations, restrictions, intermediaries, KYC measures, and various other policies that are a standard in the banking world.

The core idea behind DeFi is that the end customer can access complex financial tools from any part of the world and with any background. Considering that certain parts of the world do not have the luck of having access to western banking platforms, and in fact, almost 2 billion unbanked adults exist worldwide, DeFi’s proposal is invaluable and completely unprecedented.

To quickly summarize, DeFi covers three fundamental notions: decentralization, transparency, and accessibility. We will cover each one in further detail to provide you with a better insight into what the segment is all about.

Decentralization

Centralization is a structure of an organization that makes far-sighted, complicated, and difficult bureaucracy possible. Decentralization is the opposite of that. With decentralization, all core roles and powers are distributed to the entire organization or system rather than a small central group.

In the case of DeFi (and most of crypto), decentralization involves delegating the decision-making process to the community rather than developers, teams, and creators in general. No person has more rights compared to others, and everyone enjoys equal privileges.

Smart contracts are the main tool that enables decentralization in a blockchain network. They help with setting up rules, automation, and transparency. There is no way of ‘cheating the system’ either, from the perspective of a client or developer, as smart contracts work on preimposed logic that is open-source and available to the public.

Nearly every part of DeFi is decentralized, starting from the liquidation engine up to basic functions such as withdrawals and deposits. In the following lesson, you will have the chance to learn more about how Ethereum and smart contracts aid DeFi’s decentralization.

Transparency

Transparency is more important than ever before in the financial world. Echoes of the 2008 financial crisis have left a rough scar on people, removing trust in a sector that demands it. The event revealed the level of corruption hidden away by institutions and governments alike, which is why transparency is now considered to be a starting point for all future business interactions.

Built on top of disruptive and decentralized networks like Ethereum, PolkaDot, and Solana, DeFi achieves an incredible level of transparency simply by utilizing smart contracts. All actions and interactions on a DeFi platform are open to the public, and anyone can track market movements through the use of a blockchain explorer.

Therefore, transparency is a fundamental right in decentralized finance. Being duped is almost impossible as users have the tools to discover whether the agreed terms are not right.

Accessibility

As mentioned in the introduction, DeFi’s best feature is accessibility. For most of human history, people were limited to their immediate surroundings, which left most in the hands of fate. Vast technological innovations were the only accomplishments that helped surpass this issue, and in the 21st century, the level at which we can interact with the world around us is higher than ever.

Internet banking may appear as an evolutionary jump to most, but it is nowhere near the feats that DeFi has made. Decentralized finance succeeded in offering financial services and products to those who have zero access to banks. An internet connection and smartphone are everything a person needs to send money, take out loans, and trade markets nowadays, and it is only possible thanks to DeFi.

Final Word

Overall, DeFi is an innovative market segment of the cryptocurrency world that thrives by offering decentralization, transparency, and accessibility. The entire segment is powered by decentralized technology, mainly smart contracts and oracles, which help automate platforms from top to bottom.

DeFi covers a plethora of financial instruments that are wholly decentralized. Notable projects include Uniswap (decentralized trading), Aave (loans), Synthetix (derivatives), and Yearn Finance (yields).

Widespread use cases include:

  • Decentralized exchanges
  • Lending
  • Flash Loans
  • Derivatives
  • Yield Farming
  • Stablecoins
  • Insurance

In the next lesson, we will provide an in-depth and technical overview of the technologies behind decentralized finance. We recommend reading our Blockchain and Ethereum courses if you did not have the chance yet.

More Lessons in

A Beginner’s Guide to Decentralized Finance (DeFi)