DeFi allows for open, permissionless access to financial services and products without having to use an intermediate service.
Decentralised finance, or DeFi, uses blockchain technology to handle financial transactions. DeFi wants to make finance more democratic by replacing old, centralised institutions with peer-to-peer relationships that can offer a full range of financial services, from simple banking and loans to complex contracts and trading of assets.
How Centralised Finance operates
Today, almost every part of banking, lending, and trading is handled by centralised systems that are run by governing bodies and gatekeepers. Normal people have to deal with a lot of financial middlemen in order to get auto loans, mortgages, and to buy and sell stocks and bonds.
In the U.K, the rules for centralised financial institutions and brokerages are set by the Financial Conduct Authority (FCA) and in the USA it is done by the Securities and Exchange Commission (SEC). Over time, governments change the rules. Because of this, there aren't many direct ways for consumers to get capital and financial services. They can't get around middlemen like banks, exchanges, and lenders, who make money from every financial and banking transaction because they take a cut. Everyone must pay to play.
The New Order: Decentralised Finance
This centralised financial system is challenged by DeFi, which takes power away from middlemen and gatekeepers and gives it to regular people through peer-to-peer exchanges.
Here's what could happen. You could put your money in a savings account and get 1.00% interest on it. The bank then lends that money to someone else at a 4.50% interest rate and keeps the 3.5% profit. However, with DeFi, People can lend their savings directly to other people. This cuts out the 3.5% profit loss to the middleman and lets you keep the full 4.50% return on the money.
DeFi is powered by Blockchain.
The main technologies that make decentralised finance possible are blockchain and cryptocurrencies. When you make a transaction with a regular checking account, it gets written down in a private ledger that a large financial institution owns and manages. This is your banking transaction history. Blockchain is a public ledger that is not controlled by one person or group. Instead, it is spread out and managed by many people.
When we say that blockchain is distributed, we mean that everyone who uses a DeFi application has an identical copy of the public ledger, which records every transaction in encrypted code. This protects the system by giving users anonymity, confirming payments, and keeping a record of who owns what that is (almost) impossible for fraudsters to change.
When we say that blockchain is decentralised, we mean that the system is not run by a middleman or a gatekeeper. Parties that use the same blockchain check and record transactions. Campaigners of decentralised finance (DeFi) say that the blockchain makes financial transactions more secure. Campaigners of decentralised finance (DeFi) say that the blockchain makes financial transactions more secure.
How DeFi is being used now
DeFI is making its way into a wide range of financial transactions, both simple and complicated. It is run by programmes that don't have a central server. These programmes are called "dapps."
Bitcoin is the most well-known cryptocurrency, but Ethereum is much more flexible and can be used for a wider range of things. This means that a lot of dapps and protocols use code that run on Ethereum.
Here are some of the things that are already being done with dapps and protocols:
Transactions in the usual way.
Markets with no one in charge (DEXs).
Non-fungible tokens (NFTs)