DeFi (Decentralised Finance) refers to a financial system built on blockchain technology that operates independently of traditional centralised financial institutions like banks, using smart contracts on blockchains like Ethereum to provide financial services.
Here are the key components:
- Openness: Unlike traditional finance, DeFi platforms are open-source and permissionless, meaning anyone can use them without needing approval from a central authority.
- Financial Services: DeFi offers various services traditionally provided by financial institutions, including
Lending and Borrowing. - Exchanges: Decentralized exchanges (DEXs) for trading cryptocurrencies without a central authority.
- Insurance: Protection against smart contract failures or hacks.
- Interoperability: Many DeFi protocols are designed to work together, allowing users to move assets between different services seamlessly.
- Transparency and Security: All transactions and rules are visible on the blockchain, providing transparency.
- Inclusivity: By removing geographic and bureaucratic barriers, DeFi aims to provide financial services to anyone with internet access, potentially serving the unbanked or underbanked populations.
In essence, DeFi is about creating an open-source, accessible, and transparent financial ecosystem where users retain control of their assets, and financial products and services are powered by code on the blockchain rather than by traditional financial intermediaries.