Decentralised Finance (DeFi)
Decentralised finance (DeFi) is a financial system built on a blockchain that circumvents the intermediary role played by banks, brokerages, or exchanges in traditional finance (also called TradFi). Instead, users interact with programmes, called smart contracts.
These programmes act as replacements for TradFi’s market makers, automatically executing agreements only when certain conditions are met so that all participants can be immediately certain of the outcome. This type of automation saves time and provides reliability for all parties involved.
By eliminating centralised finance models, DeFi does away with barriers like credit scores, location, and high prices, and it lowers the risk of issues like corruption, mismanagement, and fraud risks that centralised finance can pose. Additionally, DeFi presents users with opportunities to earn passive income while retaining control over their funds, allowing for near-instant transactions and easier loan access.
Though the Ethereum blockchain handles the bulk of the DeFi volume, other DeFi protocols exist on various blockchains, and users don’t need to be advanced crypto traders to experience the benefits DeFi can offer. For instance, decentralised apps (dapps) on the Cronos blockchain are beginner-friendly and offer lower fees compared to Ethereum, and they allow for much more freedom and flexibility.
Key Takeaway
DeFi is an abbreviation of ‘decentralised finance’, which is software built on top of a blockchain that enables the creation of services much like traditional centralised financial services, with the added benefit of decentralisation.