Decentralized finance eliminates intermediaries by allowing people, merchants, and businesses to conduct financial transactions through emerging technology. This is accomplished through peer-to-peer financial networks that use security protocols, connectivity, software, and hardware advancements.4
From anywhere you have an internet connection, you can lend, trade, and borrow using software that records and verifies financial actions in distributed financial databases. A distributed database is accessible across various locations; it collects and aggregates data from all users and uses a consensus mechanism to verify it.
Decentralized finance uses this technology to eliminate centralized finance models by enabling anyone to use financial services anywhere regardless of who or where they are.
DeFi applications give users more control over their money through personal wallets and trading services that cater to individuals.
While taking control away from third parties, decentralized finance does not provide anonymity. Your transactions may not have your name, but they are traceable by the entities that have access. These entities might be governments, law enforcement, or other entities that exist to protect people’s financial interests.
What is DeFi?
DeFi refers to decentralized financial services on blockchains as opposed to “centralized” financial services provided through banks or other traditional financial institutions. It lets participants use cryptocurrency to provide most services that traditional banks offer with government-issued fiat currencies—lend, borrow, earn interest, trade assets, buy insurance, and more. DeFi services tend to be faster, cheaper, and more simple, with new advantages and services being offered each day.
What is decentralized finance?
Decentralized finance allows people to make transactions directly with other people using blockchain networks, rather than through centralized institutions like banks. This cuts out the middleman and makes financial transactions quicker, cheaper and more efficient.
With DeFi, you access your assets through secure digital wallets and enter into smart contracts to make transactions. This gives you access to a wide range of financial services, from peer-to-peer lending to trading via decentralized exchanges. DeFi is open to anyone with an internet connection, making finance far more accessible.
DeFi vs. centralized finance
Centralized finance is the default financial environment in which the world currently operates, with payments, loans, and trading activity passing through third parties and middlemen that are heavily supervised by local regulators. Decentralized finance, on the other hand, delivers a whole host of advantages by enabling people to transact through financial applications via a blockchain network, cutting out intermediaries, such as traditional banking groups.
Eliminating middlemen naturally cuts costs and speeds things up, but DeFi also makes financial services much more accessible. In the world of centralized finance, not everyone is allowed to open a bank account or given access to specific financial services. DeFi therefore has the potential to financially empower billions of people around the world who are currently denied access to banking services.
DeFi also has the advantage of providing more flexibility, for instance with trading hours not being limited the way they are with centralized finance.