Second, you can move funds around in almost an instant via the blockchain, reducing waiting times for bank transfers to clear. There are several key features that make DeFi radically different from the current financial system.įor one, it’s completely open – meaning you can use the applications by creating a digital wallet, rather than requiring having a bank account. For example, Ether is required to pay for transactions on the Ethereum network and SOL is necessary on the Solana network. They have since expanded to other networks that use smart contracts as well, like Solana and Avalanche.Īnyone can use DeFi products by going to an application’s website and connecting with a DeFi-enabled crypto wallet (such as MetaMask on Ethereum or Phantom on Solana).īecause the apps are built on a blockchain, users then must use that blockchain’s tokens to transact. Most DeFi projects are built on top of Ethereum, the second-largest cryptocurrency platform, because its programming languages are specifically designed for creating and deploying flexible smart contracts. Because they’re processed on the blockchain, smart contracts can be sent automatically without a third party involved. Smart contracts are the fuel that powers DeFi and its popular protocols like Aave, Compound, and hundreds of others. Running on the blockchain, smart contracts automatically execute transactions if certain conditions are met, and can be used for a variety of financial protocols like issuing crypto-backed loans and paying out interest on holdings. While Bitcoin can only be used as a store of value, DeFi – powered by decentralised applications (dApps) – allow parties to exchange, lend, borrow, and trade directly using the blockchain without any intermediaries and costs.Īt the core of DeFi are smart contracts, which is computer code that acts as a digital agreement between two parties. What makes DeFi distinct from cryptocurrencies like Bitcoin is that it expands the use of blockchain from direct value transfers to more complex financial use cases. The idea is that no single entity has control over or can alter the ledger. While estimates vary, the total value locked in DeFi reached over $189 billion as of January 2022.ĭeFi harnesses three main things: cryptography, the blockchain, and smart contracts.Īs with cryptocurrencies, DeFi is built on the blockchain – the decentralised, immutable, public ledger that enables all computers on a network to hold a copy of a history of transactions. In the last 18 months, the idea of DeFi has mushroomed within the crypto market, growing by 1,200 percent since the end of 2020. That is the future those building decentralised finance (DeFi) applications are aiming to bring about, one which would revolutionise the entire financial system. They don’t require you to trust them, are censorship resistant and, most importantly, much cheaper than traditional banks. Imagine there were no banks – instead, there are pieces of code running a program which act like a bank and are open to everyone. Now, the digital money revolution is moving into the world of banking – and has regulators sounding alarm bells. Bitcoin, a payment system in which anyone can send money to a recipient anywhere in the world, was just the beginning. In little over a decade, the development of cryptocurrencies have spawned a parallel universe of alternative finance.
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