Decentralized Finance, DeFi, refers by and large to financial operations that are carried out peer-to-peer, without a third party as a regulator.
It seems like a regular purchase you make on the Internet is carried out without intermediaries, too. But under the hood, the bank or the payment system provider and the government oversee the fairness of trade and enable you to call off the payment if the product quality is not satisfactory.
Such a DeFi definition is sufficient, but in the context of modern technologies (specifically, blockchain) it gains a new meaning. With the help of blockchain powered smart contracts, the deals between two parties on the Internet are approved by a piece of software, which ensures dispassionate, fair, and deterministic deal resolution.
DeFi development is crucial in the modern, post-capitalist world.
Why? The number and the volume of intellectual property users buy over the web is growing, and sellers would at least earn some penny instead of paying it to central regulating bodies that have already become overpowered.
Perhaps the meaning of what is DeFi can better be conveyed through the description of specific applications of DeFi principles below.
What is DeFi, crypto related
When you ask what is DeFi crypto fans will likely mention specific services.
Decentralized Marketplaces put the ideas of DeFi to use both in the landscape of fiat money and cryptocurrencies, enabling direct peer-to-peer trade between participants.
These markets require little to no maintenance effort because they are automated with highly secure software.
Decentralized Exchanges (DEX) match bids and offers, removing the need for an escrow service. Some of the exchanges do store the user funds in the exchange service account (which is not truly in the spirit of decentralization) while some others don’t.
See, it is about only a certain degree of decentralization. Binance has been enabling peer-to-peer crypto and fiat money trade since 2017 but they launched testnet DEX only in 2020. If they still keep single-handedly collecting transaction fees, they would be less decentralized than, for example, Waves DEX that delegates transaction processing (and fee collection, respectively) to miners.
Thus, when it comes to defining what is DeFi, crypto coins are the necessary part of the definition.
What is DeFi’s underlying structure?
DeFi is in fact composed of four layers, as described by Investopedia:
Settlement layer is where a blockchain and its cryptocurrency reside.
Protocol layer defines certain financial rules according to an asset that’s being traded.
Application layer implements an actual customer-facing solution with proper UI.
Aggregation layer defines relations between applications.
Such a division into layers emphasizes the fact that drastically different kinds of software make a whole DeFi infrastructure work.
DeFi definition in the context of politics?
If a friend of yours asks you, what is DeFi, one possible way to answer that in a sentence is: it is a way to re-distribute financial power. Raise an issue of inequality gap and elitism, mention the fact that 1% of the world’s population own 43% of the total wealth, while the bottom 50% are forced to be happy with only 1% of wealth.
DeFi is meant to change the state of affairs a little.
Decentralized Governance is another way to implement DeFi and here is how: citizens mine a certain crypto or token and fund various projects with it (as if “giving their vote”). Say, a small community on the city outskirts may fund construction of a playground for children.
The ability to use DeFi in pretty much every aspect of life expands the DeFi definition, doesn’t it?
Every rose has a thorn. DeFi is in its infancy still, and many bitter incidents related to it have happened before: DAO theft is one such mishap.
What is DeFi for you?
If you are reading this article, you are probably using cryptocurrency related technologies one way or another, or the potential of these technologies have attracted your attention to such an extent that you consider exploring the topic deeper.
Hope that our comprehensive DeFi definition, the concrete examples of what is DeFi, crypto world implementations of DeFi, and the ideological part of it help you start the journey into the world of digital assets cutting-edge finance tech. Now is the perfect time!