What is Decentralized Finance?

If I said “Finance” to you - you might think of a world of banks, stock markets, mortgages, loans, credit cards, payments…… These are all elements of the traditional finance system. So what is Decentralized Finance? Take a bank for an example. The primary function of a bank is to hold deposits for customers in something like a term deposit, paying maybe 5-10% interest to customers. They then lend this money out to creditors, who pay the the bank 15-20% interest. The bank sits in the middle - earning 20% and paying 10%! Very profitable business model. Decentralized Finance is about removing central entities such as banks from the equation and allowing market participants to transact directly with each other through blockchain, using finance tools built on smart contracts (link to blog post on this). In the world of Decentralized Finance, there is no bank, no tech support, no human administration or discretion. Everything is code based and final. Like all transactions on Blockchain, once made, Decentralized Finance transactions cannot be undone. Imagine if you didn’t need a bank or broker to send money, get a loan, earn interest, trade stocks. What if you could jump on the internet and access these tools in seconds without the costs of a central entity? This is the promise that DeFi makes. Some real examples of where Decentralized Finance has delivered on this promise: Stablecoins (blockchain-based fiat currency equivalents). Allows users to easily transact between cryptocurrencies and fiat currencies like the US dollar. Decentralized Exchanges (exchange digital assets without needed a central clearinghouse/exchange). To buy a digital asset, someone must sell that asset to you. Exchange platforms match buyers with sellers for a fee. Decentralized Exchanges present a novel way to perform this task. Lending and borrowing: (deposit digital assets, earn interest (without losing to the bank fees!). Without a banks overheads costs in the middle, borrowers pay less and lenders receive more interest. There are also novel financial innovations that exist only in the DeFi world such as perpetual futures and prediction markets. But let’s focus on the basics for now. Decentralized Finance comprises billions of dollars worth of digital assets. But it is not without it’s risks: Bugs in underlying smart contracts, lack of government deposit insurance, no undo button or customer service. Like all financial systems, it comes with risks. Are the benefits worth the risks? Take our Decentralized Finance course and make your own mind up!