DeFi is a new way of offering borrowing, lending and other complex financial products to anyone with just an internet connection without depending upon any intermediary or central authority using the Ethereum blockchain.
What is DeFi?
Decentralized finance (DeFi) is the emerging new way of offering banking and financial services products to any customer with just an internet connection, without relying on any intermediary or a central authority such as a bank. DeFi protocols are built on the Ethereum blockchain$1Moreover, the current volume of funds locked up inside the DeFi system runs into several billions. DeFi is the fastest growing segment in the blockchain and decentralized web space. These protocols are backed by large venture capital firms and pose a serious threat to the current global banking and financial services industry.
DeFi and smart contracts
DeFi products are really decentralized applications (dapps) that consist of multiple smart contracts working together to offer a service. Smart contracts are software code that work like regular contracts. They execute certain actions automatically without the need for any intermediary, if certain specified conditions are met.
Salient features of DeFi
- There are about 1.7 billion people on the planet without any access to the services offered by the incumbent banks and financial services companies$1Moreover, the major objective of the DeFi movement is to offer financial inclusion to this population that has no access to the current banking system. All you need is an internet connection to make use of a DeFi application.
- Technically, most DeFi protocols are modular, interlocking applications that run on top of the Ethereum blockchain.
- Since DeFi products are really software code distributed on a decentralized network, no one can shut down or deny access to users.
Major DeFi players
The first major decentralized application to be offered is MakerDAO, that runs on the Ethereum blockchain. MakerDAO offers DeFi lending and borrowing opportunities. Compound and Aave offer similar services. Dharma and PoolTogether offer alternative savings products. Unique payment solutions are offered by protocols such as Lightning Network and Groundhog. Uniswap and Bancor are decentralized exchanges. There are several DeFi apps that offer products and services practically in every segment of banking and financial services.
What’s next in DeFi?
These are still early days for DeFi applications and many products require the users to be quite tech-savvy. Increasingly products with user-friendly interfaces are emerging and that may lead to the beginning of mass adoption that the DeFi champions are banking on.