What is DeFi?

DeFi stands for “decentralized finance” and is a fast growing application of blockchain. DeFi uses smart contracts to automate many of the functions of traditional financial services and other markets.

If we take the traditional financial services, distill them into their component rules and processes, and convert them into self-executing code on decentralized networks - we get DeFi.

Decentralised exchanges (DEX) live on distributed online ledgers like a blockchain. Whereas traditional finance needs intermediaries to manage assets and guarantee liquidity, no third-party broker is needed in DeFi. Assets are directly managed by their owners, and liquidity is guaranteed via crowdsourced pools of assets that are locked in a smart contract. This is a natural extension of current trends towards greater automation of code, which leverage the numerous advances in computing and global connectivity.

Given its decentralized nature, a DeFi platform has no single point of failure, and no single authority capable of or responsible for making changes to data. Absence of a central authority does not mean absence of governance - rather, the platforms empower users of the protocol to be their owners too. Governance tokens are crypto assets that represent voting rights on the blockchain and as such distribute the power and authority to make major changes or upgrades to the underlying code. There are many ways of designing the governance architecture of a blockchain, and each should serve to match the primary purpose of chain itself.

By eliminating intermediaries and gatekeepers, DeFi provides global, uncensored access to decentralized exchanges. Today, billions of people in emerging markets do not have access to basic financial services, due to non-existing banking infrastructure or to their credit profile being not profitable enough by traditional banks. DeFi has the potential to widen access to financial services by removing costs and other barriers to entry: anyone on the blockchain will be able to use its services, regardless of their physical location or of the nature of their assets.

When compared to existing 'Web2' online financial services, the main benefits of decentralized exchanges are their reliability, their composability, and ultimately their open source nature. DeFi platforms are also technologically reliable because if a web3 server goes down, thousands of other nodes in the blockchain can recover its data. Composability refers to the ability to combine different programs to create new platforms, and the ability for one platform to easily access other platforms in order to access greater liquidity. Ultimately, composability stems from the open-source of the code, which incentivizes improvements by all users-owners and does not rely on traditional operators.

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