What is Defi? How is it disrupting the industries?

Decentralized finance—often called “DeFi” or “Open Finance”—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Now with over Over the past few years, Ethereum smart contracts have accumulated an immense $13 billion worth of value, sparking a rush in decentralized finance that is reshaping how individuals, developers and institutions handle their finances. With its vast range of uses cases, this sector has quickly become one of the most prominent areas within blockchain technology. In this guide, we’ll introduce the key concepts and applications of decentralized finance, explore the growth of the DeFi ecosystem, and provide resources for further learning.

What is DeFi?

DeFi is short for “decentralized finance,” referring to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on the Ethereum blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Decentralized finance has earned its pride as the most active space in blockchain technology, with a substantial $13 billion value locked up in Ethereum smart contracts and an array of use cases for everyone from individuals to developers and major organizations. In the most basic sense, DeFi applications allow users to interact with financial contracts or protocols without the need for a centralized intermediary. By deploying immutable smart contracts on Ethereum, DeFi developers can launch platforms and services that run exactly as programmed and that are available to anyone with an Internet connection. The breakthrough of DeFi is that crypto assets can now be put to use in ways not possible with fiat or “real world” assets. Decentralized exchanges, synthetic assets, and flash loans are just a few of the innovations made possible by Ethereum smart contracts. And because DeFi applications are built on open-source protocols, anyone can launch a new service or build on existing ones. As the DeFi ecosystem continues to evolve, we can expect to see even more innovative applications and use cases emerge. The possibilities are endless, but some of the most exciting areas of development include:

Asset management:

Crypto wallets are evolving into powerful tools for managing digital assets. In addition to storing private keys and handling transactions, many wallets now offer features like portfolio tracking, asset management, and decentralized exchanges.

Compliance and KYT:

In the traditional financial system, compliance around anti-money laundering (AML) and countering-the-financing-of-terrorism (CFT) relies on know-your-customer (KYC) guidelines. In the crypto space, Ethereum’s decentralized infrastructure enables next-generation compliance analysis around KYT (know your transaction) and AML/CFT.

Data and analytics:

The explosive growth of DeFi has spurred the development of a wide range of data and analytics tools. From block explorers to DeFi dashboards, these tools provide insights into the inner workings of decentralized protocols and help users make informed decisions about where to invest. These are just a few examples of the many applications of DeFi. For a more comprehensive overview, check out our guide to the top 50 DeFi protocols.

The Benefits of Decentralized Finance

The breakthrough of DeFi is that crypto assets can now be put to use in ways not possible with fiat or “real world” assets. Decentralized exchanges, synthetic assets, and flash loans are just a few of the innovations made possible by Ethereum smart contracts. And because DeFi applications are built on open-source protocols, anyone can launch a new service or build on existing ones.

There are many benefits of decentralized finance, but some of the most noteworthy include:

Open access: In the traditional financial system, access to financial services is often restricted by geography, income, and other factors. With DeFi, anyone with an Internet connection can access a wide range of financial protocols and platforms. Censorship resistance: Decentralized applications are built on open-source protocols that run on the Ethereum blockchain. This makes them censorship-resistant, meaning that no single entity can shut them down. Permissionless innovation: In the traditional financial system, innovation is often stifled by legacy systems and regulations. With DeFi, anyone can launch a new protocol or application without having to obtain permission from any centralized authority. Increased security: Decentralized applications are powered by Ethereum smart contracts, which run on the blockchain. This makes them more secure than traditional centralized applications, which are often susceptible to hacks and security breaches. Improved transparency: DeFi applications are built on open-source protocols that run on the Ethereum blockchain. This makes them transparent, meaning anyone can audit the code and verify that it functions as intended. Lower barriers to entry: In the traditional financial system, many services require expensive infrastructure and licenses. With DeFi, anyone can launch a new protocol or application without having to invest in expensive infrastructure. Increased efficiency: DeFi protocols are often more efficient than traditional financial services because they automate many of the tasks that would normally be done manually. This can lead to lower costs and faster transaction times. In conclusion, decentralized finance has the potential to revolutionize the financial system by making it more accessible, efficient, and secure. We are still in the early stages of DeFi development, but the industry is growing rapidly and we are already seeing some incredible applications being built on Ethereum.