What is DeFi ?
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| Decentralized finance |
Definition
Short for decentralized finance, DeFi is an
umbrella term for peer-to-peer financial services on public blockchains,
primarily Ethereum.
DeFi (or
“decentralized finance” is an umbrella term for financial services on public
blockchains, primarily Ethereum. With DeFi, you can do most of the things that
banks support – earn interest, borrow, lend, buy insurance, trade derivatives,
trade assets and more – but it’s faster and doesn’t require paperwork or a
third party. As with crypto generally, DeFi is global, peer-to-peer (meaning
directly between two people, not routed through a centralized system),
pseudonymous, and open to all.
Why is DeFi important?
DeFi takes the basic
premise of Bitcoin – digital money – and expands on it, creating an entire
digital alternative to Wall Street, but without all the associated costs (think
office towers, trading floors, banker salaries). This has the potential to
create more open, free, and fair financial markets that are accessible to
anyone with an internet connection.
What are the benefits?
Open: You don’t need to apply for anything or “open” an account. You just get
access by creating a wallet.
Pseudonymous: You don’t need to provide your name, email address, or
any personal information.
Flexible: You can move your assets anywhere at any time, without
asking for permission, waiting for long transfers to finish, and paying
expensive fees.
Fast: Interest Rates and rewards often update rapidly (as quickly as every 15
seconds), and can be significantly higher than traditional Wall Street.
Transparent: Everyone involved can see the full set of transactions
(private corporations rarely grant that kind of transparency)
How does it work?
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.
Here are some of the
ways people are engaging with DeFi today:
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.
Saving for the future: Put some of your crypto into savings account
alternatives and earn better interest rates than you’d typically get from a
bank.
Buying derivatives: Make long or short bets on certain assets. Think of
these as the crypto version of stock options or futures contracts.
What are the downsides?
Fluctuating
transaction rates on the Ethereum blockchain mean that active trading can get
expensive.
Depending on which
dapps you use and how you use them, your investment could experience high
volatility – this is, after all, new tech.
You have to maintain your
own records for tax purposes. Regulations can very from region to region.