Decentralized finance, or DeFi, is a term used to describe the ecosystem made up of financial applications built on top of blockchain systems. Essentially, we can summarize DeFi as the movement that encourages the creation of different types of financial products and services via open-source software and decentralized networks.
The goal is to create and run financial DApps on top of a framework that is both trustless and transparent, like a permissionless blockchain or other peer-to-peer (p2p) protocol.
At present, the top three decentralized finance functions are:
- Creating platforms for p2p or pooled borrowing and lending.
- Making monetary banking services, such as issuing stablecoins.
- Implementing advanced financial tools like tokenization platforms, DEX, and derivatives and predictions markets.
There are multiple types of decentralized finance services across these three areas. Other use cases and products include index construction, software development solutions, funding protocols, data analysis applications, and subscription payment protocols. Additionally, decentralized finance apps could be utilized for AML, KYC, and alternative ID-management solutions.
Decentralized finance offers a number of benefits when compared to more traditional financial services. It’s easier and more secure to deploy a financial product or application with distributed systems and smart contracts. A lot of DApps, for example, have been built on the Ethereum blockchain. This is known for having lower obstacles to entry and smaller operating costs.
In conclusion, then, the decentralized finance movement is leading conventional financial products to the world of open-source software and decentralization. That means there’s less requirement for intermediaries, better security, and smaller costs overall.