Decentralized Finance, known as DeFi, refers to the financial activities that are possible with blockchain technology.
Decentralized Finance (DeFi) benefits and common use cases.
Many of these activities, such as borrowing, lending, trading assets or derivatives, and savings accounts (that are normally conducted through a bank, financial institution, or company) can be replicated and improved in DeFi.
In the traditional finance world, if one wishes to take out a loan or open a bank account, they would apply, fill out paperwork, and put their money in the custody and control of a bank or credit union. DeFi, on the other hand, is meant to be trustless and permissionless; in other words, only you are in control of your funds on DeFi the entire time, and the blockchain code that you interact with will only follow the instructions that it is programmed to do.
DeFi protocols have several benefits for their users:
- Few (if any) fees to use services
- Transactions are faster than traditional money transfers
- User maintains custody and access to funds from their own wallet
- Privacy and anonymity
- No registration or approvals
- Accessible to anyone with access to the technology
- Some protocols and strategies allow you to earn yield that is much more profitable than the APY found in a traditional savings account.
- Competitive rates of return and rewards
Common terms and strategies you might hear for DeFi:
- Primitives (basic operations of DeFi that give options to users and developers)
- Yield Farming
- Liquidity Mining or Liquidity Pooling
DeFi as a financial sector continues to grow as users discover alternative possibilities of managing their money. All of crypto reached a peak Total Value Locked (TVL) into DeFi in November of 2021 at over $100 Billion dollars in assets. Regulation of DeFi differs depending on regional government, but at its core DeFi remains open to all.