What is DeFi? — A Comprehensive Guide
DeFi is the acronym for decentralized finance. The obvious question that arises here is, how do we decentralize finance? In DeFi, a wide range of financial applications is used to cut off the intermediaries. Intermediaries, in this context, imply banks, lawyers, and other non-banking financial corporations.
Think of a typical transaction in the traditional world of finance. Suppose, you are purchasing a T-shirt using your credit card. The transaction is primarily between you and the seller of the T-shirt. However, the transaction is successful only when the bank that has issued your credit card approves the transaction. In decentralized finance, there is no need for a third-party to get involved.
In decentralized finance, what governs the transactions are the smart contracts. These are self-executing contracts. They are written as codes with some predetermined conditions in place. Once both the parties involved agree upon these conditions, these codes execute themselves. These contracts, developed on blockchain protocols, are the backbone of any DeFi network.
According to market research estimates, the total value of DeFi contracts increased from US$2.1 million to US$6.9 billion between September 2017 and August 2020. This surge is based on the excellent momentum that DeFi has gained over the last few years.
Let’s take a closer look at DeFi, what drives it, its advantages and complications, and, maybe, we’ll understand more about his magic which is DeFi!
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