Decentralized Finance (DeFi)

Decentralized Finance, or DeFi for short, is a new way of providing financial services to the masses, minus the middleman in many cases.

Think of traditional financial services like money exchange and transfers, savings and lending, but now they’re online and digital, global and easily transferrable.

They’re also programmable, allowing them to be interconnected to other services via different protocols, all existing on the blockchain.

It’s a seismic shift away from the closed-off and centralized financial world to a more open-sourced and decentralized world of services.

Decentralized Finance also comes with several benefits not realized by traditional financial markets.

Transparency – blockchains are public ledgers, and they share records across a decentralized network, providing better transparency of data and who interacts with that data
Immutability – blockchain records are secure, permanent, they can’t be removed, and they can’t be altered once verified and added to the blockchain
Being Permissionless – blockchains that are permissionless are open to everybody with an Internet connection and a crypto wallet. No banks are necessary. No middlemen get in the way of transacting.
Custody – users of DeFi products and services can take custody of their assets and not rely on a 3rd party to do so.
Open-source – Open-source software and collaboration breeds trust and better quality code, ultimately leading to a better user experience
Smart contracts – These can be designed in a custom fashion to work automatically, in a trusted fashion, anonymously

DeFi takes traditional financial services that are often difficult for regular folks to take advantage of and puts those services into the palm of their hands, using blockchain technology and smart contracts.

Related Terms

Money Legos

Also called Money Legos, refers to the idea of composability, the combining of simple protocols that are already doing something very well on their own, into a brand new protocol or service. Lego blocks, or individual protocols operating on the same blockchain network, can “snap” onto another Lego block, or protocol, creating new and incredible DeFi projects. The protocols can interoperate, or work together using middleware, that binds the various protocols together.

Blockchain

Blockchain networks are at the heart of cryptocurrencies. A blockchain is a database, or digital ledger, made up of a series of interconnected blocks containing transaction data created on the network over some period of time. Each block in a blockchain also contains a unique identifier unlike any other block in the chain called a hash. Think of the hash as a fingerprint identifying that block for all other blocks. Distributed ledger technology (DLT) is another name frequently used in relation to blockchains.

Public Blockchain

A network that is globally accessible by anyone anywhere in the world. Another name for a public blockchain is a permissionless blockchain. Bitcoin and Ethereum are the most popular decentralized public blockchains in the world.

Ethereum (ETH)

Ethereum is a decentralized blockchain platform that makes digital money, global payments, and applications possible using open-source software and smart contract functionality. The big difference between the two is that Ethereum is programmable, meaning you can build and use decentralized apps on the network. That means the Ethereum blockchain can be programmed to do virtually anything.

Polkadot (DOT)

Polkadot (DOT) is an open-source blockchain protocol for cryptocurrencies, dubbed the “blockchain of blockchains”, that allows different, incompatible networks to communicate with each other and share data, using a multichain design.