What is Decentralized Finance?

Decentralized Finance (DeFi) is a system by which financial products become available on a public decentralized blockchain network. That makes these financial products open to anyone to use, rather than going through middlemen like banks, brokerages or exchanges. Unlike a brokerage account or bank, a government-issued ID, Social Security number, or proof of address are not necessary to use DeFi. More specifically, DeFi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction.

Multiple technologies, services, and protocols are used to achieve the goal of decentralization. For example, a decentralized system can consist of a mix of open-source technologies, blockchain, and proprietary software. Smart contracts that automate agreement terms between buyers and sellers or lenders and borrowers make these financial products possible.

Regardless of the technology or platform used, DeFi systems are designed to remove intermediaries between transacting parties. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. Some DeFi applications promote high interest rates but are subject to high risk. As of October 2021, the value of assets used in Decentralized Finance amounted to US $100 billion.