Related Terms
DEFINITION
Decentralized Finance (DeFi)
Decentralized Finance (DeFi) is a financial ecosystem based on the blockchain that provides open, permissionless, and transparent financial services without relying on traditional banks or intermediaries. It utilizes smart contracts to automate transactions that are transferred directly from one wallet to another. Besides the absence of intermediaries, decentralized finance also looks to be more inclusive, removing limiting factors such as geographical restrictions.
Synonyms
Open finance, peer-to-peer finance
Acronyms
DeFi
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Synonyms
Open finance, peer-to-peer finance
Acronyms
DeFi
Examples
A user wants to earn interest on their cryptocurrencies. Instead of going through a traditional bank and lending that way, they decide to lend through a DeFi platform. The lending process is facilitated by the smart contract, distributing interest payments directly to the lender’s wallet, all without intermediaries or direct oversight.
FAQ
How does decentralized finance differ from traditional finance?
Traditional finance relies on intermediaries such as banks, brokers, and regulators to facilitate transactions and ensure compliance. DeFi on the other hand operates on the blockchain, using smart contracts to facilitate transactions without oversight from a centralized body.
What are the risks of decentralized finance?
Since smart contracts are based entirely on code, are the sole facilitator of transactions, and can’t be changed once deployed, mistakes in the code can be exploited. DeFi also has a higher barrier to entry as some technical expertise is typically needed.
What are the benefits of decentralized finance?
Decentralized finance processes transactions indiscriminately. In other words, anyone with internet access can use DeFi regardless of their geographical location, credit score, or other external factors. DeFi can also be seen as the more transparent option due to the usage of public blockchains.
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