What is DeFi? A 3-minute guide to decentralized finance - Decrypt (2024)

In Brief

  • DeFi, shorthand for “decentralized finance,” is a catchall term for a group of financial tools built on a blockchain.
  • The idea is to allow anyone with internet access to lend, borrow and bank without going through middlemen.
  • DeFi is one of the fastest growing areas of the blockchain and decentralized web space.

Your Web3 Gaming Power-Up

Enjoy exclusive benefits with the GG Membership Pass

Decrypt’s Art, Fashion, and Entertainment Hub.

Discover SCENE

Bitcoin—a payment system in which anyone on earth can send money to anyone else—was just the start of the crypto revolution. The people building DeFi applications seek to take accessibility one step further. Decentralized finance has been touted as a possible solution to lowering the barrier of entry for those who struggled to access bank accounts. And more recently, it's being utilized by cryptocurrency owners for another purpose: to make more money.

Let’s take a look.

What is DeFi?

AD

AD

Taken collectively, DeFi apps are financial products that run on a public blockchain, such as Ethereum. These products are permissionless, meaning they don't use third parties. Instead of financial intermediaries, such as brokers and banks, everything is automated into the protocol via smart contracts.

Want to take out a loan? You don't need the bank to hand you money. You can get a loan directly from your peers. Ready to bet on Bitcoin futures and other derivatives? Forget finding a bookie. You can let the protocol handle it. Looking to swap one asset for another? Decentralized exchanges can facilitate the transaction without taking a huge cut.

Who invented DeFi?

There is no single inventor of DeFi, but DeFi applications first appeared on top of Ethereum, which was invented by Vitalik Buterin. They have since expanded to other networks that use smart contracts to automate transactions. These include Solana, Binance Smart Chain, and Avalanche.

Did you know?

Prominent venture capital firm

Andreessen Horowitz led multi-million dollar investment rounds in both Compound and MakerDAO–pillars of the current DeFi ecosystem.

What’s so special about it?

DeFi has several key features.

First, it's "open," meaning you can use the applications by creating a wallet—often without displaying any identifying information, such as name and address. That's theoretically (if not technologically) simpler than having a bank account.

AD

AD

Second, you can move funds around near-instantaneously via a blockchain, so no waiting for the bank transfer to clear.

#DeFi, a full exchange, running on a blockchain, with just a few lines of code, without any human intervention. The simplicity is beautiful.

— CZ 🔶 Binance (@cz_binance) August 4, 2021

Third, the rates (for now, at least) are much better than at traditional banks, though transaction costs vary depending on the blockchain network.

Last, DeFi applications work together like “money Legos." This "composability" allows anyone to create, modify, mix and match, link, or build on top of any existing DeFi product without permission. Unfortunately, this feature may also be DeFi’s biggest weakness, because if a key component, such as the DAIstablecoin, becomes vulnerable or corrupted, the whole ecosystem built around DAI may come crashing down.

What can you do with DeFi?

There are three basic types of DeFi applications.

💰 Lending/borrowing: If you own cryptocurrency, you can lend it to a protocol such as Aave or Compound in exchange for interest and/or rewards. Likewise, you can borrow digital assets from such a protocol, which is particularly useful if you want to make a trade. Be careful, though! Most DeFi protocols use over-collateralization, meaning you must put up more than the amount you want to borrow; if the asset's value falls too much, the protocol may take your collateral to avoid losses.

Many DeFi users utilize this as a way to earn assets through "yield farming," in which they lock up funds in a pool of assets to get rewards. Since rates vary depending on protocol and asset, skilled yield farmers move their assets to capitalize on the best rates.

💱 Trading: With centralized exchanges such as Coinbase and Binance, you're relying on the exchange to take custody of your assets with each trade. Decentralized exchanges remove the intermediary so people can trade directly with one another. Moreover, DEXes such as Uniswap and PancakeSwap allow people to list new tokens for trading. The lack of vetting increases the risks, but it also allows people to "get in early" on new assets before they hit wider markets.

AD

AD

💸 Derivatives: Sometimes you don't want to be limited to trading particular coins or tokens. Derivatives platforms such as dYdX and Synthetix allow people to do more than spot trading. For example, users can make leveraged trades in which they bet more than they have, or even create "synthetic assets" that mimic traditional stocks and commodities.

How are DeFi applications produced?

Anyone capable of writing smart contracts is able to create DeFi applications. There are several tools for testing and/or deploying smart contracts, among them Truffle and Ganache for Ethereum. After downloading a framework to build smart contracts, you can create a token that allows a protocol to utilize the blockchain network. On Ethereum, this is an ERC20 token; on Solana it's called SPL; and Binance Smart Chain has BEP20s.

Having a token allows the protocol to interact directly with the layer-1 blockchain's coin. But projects have also promoted their tokens to push decentralization. Lending protocol Compound, for instance, uses COMP as a governance token; those who hold it get to make decisions about the protocol's code and treasury allocations.

How do you use DeFi products?

Anyone can use DeFi products by going to an application’s website and connecting with a DeFi-enabled crypto wallet, such as MetaMask on Ethereum or Phantom on Solana. Most DeFi dapps do not require users to give up any personal information or register.

However, because the applications are built atop a blockchain, you must use that blockchain's coins to pay for transactions. ETH is required in order to pay for transactions on the Ethereum network, SOL is necessary on the Solana blockchain, and so forth.

The Future of DeFi

As of November 2020, less than $20 billion worth of value was locked in various DeFi products, most of them on Ethereum. By the following year, it was worth more than $260 billion, with $19 billion coming from Binance Smart Chain alone.

If the trend continues and the DeFi maximalists are right, this is just the beginning of a massive DeFi wave. True believers argue that the advantages of an open and decentralized financial system are simply too compelling to not capture trillions of dollars of value.

But challenges remain. In November 2021, risk management firm Elliptic estimated that DeFi users lost $10.5 billion to hacks and scams over the preceding two years.

AD

AD

Headlines like that have drawn the attention of regulators. In August 2021, U.S. Securities and Exchange Commission chairman Gary Gensler called for tougher regulation of DeFi, and suggested that some DeFi platforms could fall foul of securities laws. Months later, he argued that "without protections, I fear that it's going to end poorly." Thailand's SEC has also come out in favor of regulation, suggesting that some DeFi projects could require a license to operate in the country.

And the Bank of International Settlements has gone a step further, warning that DeFi vulnerabilities "exceed those in traditional finance" and could even threaten global financial stability. There's a battle shaping up between DeFi advocates and its critics.

Stay on top of crypto news, get daily updates in your inbox.

What is DeFi? A 3-minute guide to decentralized finance - Decrypt (2024)

FAQs

What is the DeFi answer? ›

Decentralized finance (DeFi) is a new financial framework consisting of decentralized blockchain protocols and underlying smart contract technology. DeFi, as it is most commonly known, makes it possible for users to access different types of financial products and services without the need for a centralized authority.

What is DeFi in simple terms? ›

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.

What is DeFi a beginner's guide to decentralized finance? ›

Decentralized finance (DeFi) is a financial system built on blockchain technology, allowing for peer-to-peer transactions without inter. DeFi eliminates the need for traditional banking institutions and relies on smart contracts and decentralized applications (DApps).

What is the best explanation of DeFi? ›

Accessibility: DeFi aims to provide financial services to anyone with an internet connection, regardless of geographical location or socioeconomic status. Users can access DeFi applications using crypto wallets and interact with the ecosystem using cryptocurrencies like Ethereum.

Is DeFi good or bad? ›

Faulty smart contracts are among the most common risks of DeFi. Malicious actors eager to steal users' funds can exploit smart contracts that have weak coding. Most decentralized exchanges enable trading through the use of liquidity pools.

What is an example of a DeFi? ›

As an example, DeFi applications like Uniswap and SushiSwap have revolutionized the way cryptocurrencies are exchanged; both are decentralized exchanges that allow users around the world to swap and exchange a wide variety of digital assets, such ERC20 tokens, an Ethereum token standard for fungible tokens, in the ...

Is Bitcoin a DeFi? ›

The biggest differentiator between DeFi and Bitcoin is their concept. While DeFi is a decentralized financial services system, Bitcoin is a cryptocurrency. Simply put, DeFi is the environment that facilitates Bitcoin transactions between two individuals or parties.

Who owns DeFi? ›

The ownership structure of DeFi Technologies (TSE:DEFI) stock is a mix of institutional, retail and individual investors. Approximately 0.04% of the company's stock is owned by Institutional Investors, 51.67% is owned by Insiders and 48.29% is owned by Public Companies and Individual Investors.

How to make money in decentralized finance? ›

Ways to Earn Passively in DeFi
  1. Lending. Lending and borrowing are fundamental features of traditional finance, and they have also been successfully implemented in the DeFi world. ...
  2. Staking. ...
  3. Liquidity Provision. ...
  4. Yield Farming.
May 20, 2024

Why are people using DeFi? ›

DeFi helps users to manage their assets more efficiently. Thanks to DeFi, users can access asset management strategies powered by smart contracts, designed to maximize returns while minimizing exposure to volatility and other market risks.

What is DeFi and how to invest? ›

In the end, to invest in DeFi means to invest in a cryptocurrency that is used to engage in DeFi protocols or companies that have an interest in DeFi space. There are two ways to start investing in DeFi: speculating on their prices using CFDs or buying the DeFi assets in the hope they increase in value.

What is the best DeFi platform? ›

Top 10 Leading DeFi Platforms of 2024
  • Aave. ...
  • MakerDAO. ...
  • SushiSwap. ...
  • PancakeSwap. ...
  • Yearn Finance. ...
  • Curve Finance. ...
  • Synthetix. Empowering users to trade various synthetic assets on the blockchain, Synthetix's decentralized nature and diverse asset offerings contribute to its prominence in the DeFi ecosystem. ...
  • Terra.
Mar 6, 2024

What is DeFi in layman terms? ›

DeFi stands for Decentralized Finance.” Simply put, “DeFi” is a term given to various decentralized financial services that aim to replace our current centralized financial system.

Why is DeFi better than banks? ›

Benefits of DeFi

Because DeFi is digital, it is available 24/7 from anywhere with an internet connection, eliminating the need to trade when markets are open or to conduct business during banking hours.

What are the benefits of DeFi? ›

DeFi Benefits

Near-instant execution without reliance on third parties. Virtually no geographic limitations. Full control over your funds and information. Unlimited combinability of protocols. Returns on investment that may be unavailable in traditional finance.

What is DeFi trying to solve? ›

DeFi attempts to eliminate the fees banks and other financial service companies charge while promoting peer-to-peer transactions.

What is actual DeFi? ›

Short for decentralized finance, DeFi is an umbrella term for a variety of applications and projects in the public blockchain space geared toward disrupting the traditional finance world. Inspired by blockchain technology, DeFi is referred to as financial applications built on blockchain technologies.

What is DeFi quiz? ›

Summary of the Decentralized Finance (DeFi) test

This Decentralized Finance (DeFi) test evaluates candidates' technical knowledge of DeFi and the DeFi ecosystem. This screening test helps you identify experts who are well-versed in Decentralized Finance and work competently in this field.

What is my DeFi pet? ›

Based on KardiaChain and Binance Smart Chain (BSC), My DeFi Pet is a cryptocurrency pet simulation game made public on 14 May 2021. This game combines the concept of NFT collectables, players' personalities and DeFi. The game activities involve evolving, collecting, breeding, trading, socialising and battling pets.

Top Articles
Purchase-to-Pay (P2P) Process - How the P2P Cycle Works | Medius
What are 401(k) Fees? - Experian
AllHere, praised for creating LAUSD’s $6M AI chatbot, files for bankruptcy
Trevor Goodwin Obituary St Cloud
Housing near Juneau, WI - craigslist
Uti Hvacr
Regal Amc Near Me
Koordinaten w43/b14 mit Umrechner in alle Koordinatensysteme
Hertz Car Rental Partnership | Uber
35105N Sap 5 50 W Nit
Khatrimaza Movies
Evita Role Wsj Crossword Clue
Morgan Wallen Pnc Park Seating Chart
104 Presidential Ct Lafayette La 70503
Craigslist Jobs Phoenix
Discover Westchester's Top Towns — And What Makes Them So Unique
VMware’s Partner Connect Program: an evolution of opportunities
fort smith farm & garden - craigslist
Spoilers: Impact 1000 Taping Results For 9/14/2023 - PWMania - Wrestling News
Recap: Noah Syndergaard earns his first L.A. win as Dodgers sweep Cardinals
12 Top-Rated Things to Do in Muskegon, MI
About My Father Showtimes Near Copper Creek 9
Construction Management Jumpstart 3Rd Edition Pdf Free Download
Greensboro sit-in (1960) | History, Summary, Impact, & Facts
The 15 Best Sites to Watch Movies for Free (Legally!)
Costco Jobs San Diego
Free T33N Leaks
TJ Maxx‘s Top 12 Competitors: An Expert Analysis - Marketing Scoop
Bfri Forum
Baddies Only .Tv
Flaky Fish Meat Rdr2
Weekly Math Review Q4 3
Terrier Hockey Blog
Page 5662 – Christianity Today
The Transformation Of Vanessa Ray From Childhood To Blue Bloods - Looper
Gravel Racing
Miami Vice turns 40: A look back at the iconic series
Busted Newspaper Mcpherson Kansas
Tfn Powerschool
Garland County Mugshots Today
Thothd Download
Walmart 24 Hrs Pharmacy
Marcal Paper Products - Nassau Paper Company Ltd. -
Elven Steel Ore Sun Haven
Cvs Coit And Alpha
Take Me To The Closest Ups
Big Brother 23: Wiki, Vote, Cast, Release Date, Contestants, Winner, Elimination
Slug Menace Rs3
18 Seriously Good Camping Meals (healthy, easy, minimal prep! )
Craigslist Farm And Garden Missoula
Latest Posts
Article information

Author: Arline Emard IV

Last Updated:

Views: 6798

Rating: 4.1 / 5 (52 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Arline Emard IV

Birthday: 1996-07-10

Address: 8912 Hintz Shore, West Louie, AZ 69363-0747

Phone: +13454700762376

Job: Administration Technician

Hobby: Paintball, Horseback riding, Cycling, Running, Macrame, Playing musical instruments, Soapmaking

Introduction: My name is Arline Emard IV, I am a cheerful, gorgeous, colorful, joyous, excited, super, inquisitive person who loves writing and wants to share my knowledge and understanding with you.