What is DeFi? Decentralized Finance

What is DeFi in Crypto?

DeFi in crypto refers to decentralized financial applications built on blockchain networks that allow users to manage money without intermediaries. To define decentralized finance, it is a system where financial services operate through open-source code and smart contracts rather than banks or financial institutions.

When people ask, What is DeFi?, the answer is simple: it is peer-to-peer finance powered by blockchain technology.

How Decentralized Finance Works

Decentralized finance uses blockchain technology to provide financial services without centralized control. Instead of relying on banks, DeFi applications use smart contracts to enable lending, borrowing, trading, and saving directly between users.

The democratized nature of DeFi is especially attractive in developing countries where access to traditional financial services is limited. However, DeFi adoption is currently strongest in developed regions with established cryptocurrency ecosystems.

While DeFi’s foundation traces back to Bitcoin—the first decentralized cryptocurrency—it has expanded into a broader ecosystem that connects global financial markets to anyone with an internet connection.

The Features of DeFi

There are many parts that make up the world of decentralized finance. Storage, lending, loaning, insurance, crowdfunding, and simple transfers are all aspects of innovation that are taking place in DeFi.

Decentralized technology is still emerging, making widespread adoption a challenge. As developers iterate and advance the technology, the hypothetical benefits are already being realized by early adopters, who are eager to share the benefits with the disenfranchised.

Storage and transfers

Storing and transferring your money in a decentralized way has been an aspect of DeFi for so long that it is often left out of what makes DeFi what it is.

The truth is, it is the cornerstone on which DeFi is built on top of. Without the ability to own your money directly and control when and how you transfer it, the rest of DeFi would fall apart. Nothing in DeFi takes place without your consent, and this is by design.

Loaning and lending

The total value of all cryptocurrencies rose above $100 billion in 2017 and never came back down. People naturally began developing more ways to grow and use this accumulation of wealth.

Lending and loaning your money are interrelated to one another. Cryptocurrency lending platforms such as Nexo allow anyone to deposit cryptocurrency assets and lend them to others.

On the other side, if you need access to additional capital, you can use your cryptocurrency as capital and collateralize a loan. The interest rates on the loans are often higher than the rate you’ll receive from a bank.  The one caveat is that it arguably carries more inherent risk than a traditional bank.

Mass crowdfunding

A massive aspect of DeFi is the ability to rally together millions of dollars from the crowd in minutes, hours, days, weeks, and even years. This was thoroughly demonstrated in 2017, during the great crypto boom.

During this time, Ethereum was being used as a crowdfunding platform through the use of smart contracts. Ethereum made it simple for people to create their own token, or coin, and sell it to the public.

The idea is that the tokens or coins represented some sort of stake in whatever project or technology would be manifested from the efforts of developers. This system was abused quite heavily, as there was no legally binding obligation for the facilitators of the sale of these tokens to make good on the promises they made to investors.

DeFi is still young, and so the seedy underbelly of the internet and financial world can be expected to have their hand in the pot while the white knights in the space iron out the kinks.

How smart contracts make DeFi possible

Smart contracts are one of the most important technologies behind decentralized finance. These self-executing programs automate financial agreements and ensure that transactions occur exactly as coded.

It makes it possible to financially interact with other people in the world and trust that the terms of the contract will be executed according to the agreement.

This innovation makes conducting trade or finance much simpler when trust is in short supply. Any parties involved in the transaction no longer need to trust one another; they may now place trust in the computer that handles the interaction. This role was previously held by bankers and lawyers.

Decentralized Finance is a Skip Technology

One of the most exciting developments to emerge from DeFi is the adoption of cryptocurrencies and other decentralized forms of money by the underdeveloped world.

The term skip technology was realized when the underdeveloped world skipped land phone lines and went straight to cell towers and cell phones.

While the developed nations needed to go incrementally from one technology to another, this pace was too quick for countries without the infrastructure to deploy complex communication networks.

As costs sank and the technology became more widespread, setting up cell towers presented itself as a more readily available gain over the previous land-based communication lines.

Decentralized finance is primed to follow a similar route to cell phones. The number of people gaining access to the internet is growing rapidly on a day-to-day basis.

With a basic internet connection, anyone can bypass the limitations of local financial infrastructure and participate directly in the global economy. Decentralized finance  empowers individuals by providing accessible, low-cost financial services without relying on traditional banks.

Its strongest appeal lies in its human impact.

People want to feed their families, protect their savings, and plan for a better future. DeFi makes this possible by enabling users to move money across borders with minimal fees, preserve wealth without losing value to inflation, and access stable digital currencies for everyday needs like groceries. By delivering these essential financial tools, DeFi is rapidly becoming a practical alternative to traditional financial systems.

How DeFi Has Become an Umbrella Term

Decentralized finance is an umbrella term for peer-to-peer financial interactions. It was a natural progression for us to build international banks and corporations. This is one of the quickest ways that human civilization could build a global civilization.

Until now, it hasn’t been possible to trade and transfer value on a global level without the help of international banks. The invention of the internet has brought us all much closer together.

We can now trade, transfer, and share information on a peer-to-peer basis. Just as blogs and video platforms reduced reliance on centralized media, cryptocurrency and DeFi are reducing the dependence on centralized financial systems.

What the internet did to information, blockchain is now doing for finance.