Decentralized finance (DeFi) is a financial system built on blockchain technology that allows for the creation of decentralized, peer-to-peer financial applications and services. In DeFi, traditional financial intermediaries such as banks and governments are replaced by smart contracts and decentralized protocols.
DeFi differs from traditional finance in several key ways.
1. DeFi is built on decentralized and open-source technology, which allows for greater transparency and accessibility. In traditional finance, financial institutions and intermediaries often act as gatekeepers, controlling access to financial services and information. In DeFi, anyone with an internet connection can access and participate in the financial system.
2. DeFi operates on a trustless and permissionless model, meaning that transactions are processed and validated by the network rather than by centralized intermediaries. This eliminates the need for trust in intermediaries and allows for the creation of truly peer-to-peer financial services.
3. DeFi allows for the creation of new financial instruments and markets that are not possible in traditional finance. For example, DeFi protocols can create decentralized derivatives and prediction markets, as well as tokenized assets such as real estate and art.
4. DeFi allows for the creation of new forms of collateral and lending, as well as new forms of insurance, that are not possible in traditional finance.
5. DeFi is built on transparency and immutability, as all transactions and activities are recorded on a public blockchain. This allows for greater trust and security in the financial system, as well as the ability to audit and track all transactions.
In summary, DeFi is a new and emerging financial system built on decentralized technology that offers greater transparency, accessibility, trustless and permissionless model, new financial instruments and markets, and new forms of collateral and lending. It differs from traditional finance by replacing centralized intermediaries with decentralized protocols and smart contracts, enabling new forms of financial interactions and creating new opportunities for individuals and businesses. DeFi has the potential to democratize finance and bring financial services to underbanked and unbanked communities around the world.