Definition: short for decentralized finance, DeFi is an umbrella term for peer-to-peer financial services on public blockchains.

 

<>  As the name suggests, decentralized finance is the opposite of centralized finance, which is the system we now operate under—at least most people do, most of the time.

<> For example, if you buy something from an online store and pay with your credit card, the credit card company  and your bank act as middlemen before the money ends up in the coffers of the shop you’re in.

 

<> In the scenario proposed by most proponents of DeFi, instead of using your card, you would use some form of cryptocurrency and circumvent the fees demanded by the credit card company and the bank.

 

<> DeFi applications would instead rely on so-called stablecoins like Dai or Tether. These currencies are usually pegged to an existing real-world fiat currency, often the U.S dollar, and generally don’t show the crazy spikes upward and downward of Bitcoin.

 

<> Smart contracts are also an interesting new development.  They’re decentralized apps, or dApps, existing on a blockchain (usually the Ethereum blockchain), self-contained little programs that fire when agreed-upon conditions are met—that’s the “smart” bit.  However once the deal is made, it can’t be altered. 

 

 

What are some benefits of DEFI?

DeFi would extend much more than just paying for online goods and services; it aims to take banks out of the equation entirely.

 

• Open: You don’t need to apply for anything or “open” an account. You just get access by creating a wallet.

 

• Pseudonymous: You don’t need to provide your name, email address, or any personal information.

 

• Flexible: You can move your assets anywhere at any time, without asking for permission, waiting for long transfers to finish, and paying expensive fees.

 

• Transparent: Everyone involved can see the full set of transactions (private corporations rarely grant that kind of transparency)

 

Under DeFi, you could make a deal with somebody online, set down the terms and conditions in a smart contract and then go from there. Instead of dealing with a bank or some other kind of loan company, you’d just deal with another individual.

 

 

 

Common problems with De-Fi

 

One big issue is the reliance on cryptocurrency. These currencies are inherently unstable, even stablecoins: most stablecoins see some fluctuation over time, just not as dramatic as Bitcoin’s shifts.

 

• Paying a loan off in gets to be worth more, this would make your loan more expensive, a scary thought.

 

• Fluctuating transaction rates on the Ethereum blockchain mean that active trading can get expensive.

 

• Depending on which dapps you use and how you use them, your investment could experience high volatility – this is, after all, new tech.    

 

• You have to maintain your own records for tax purposes. Regulations can vary from region to region.

 

• Scams are common, and it’s far too easy to get away with not paying people or otherwise shirking payments and the like.

 

DeFi is still very much a playground for people that like risk. If that’s not you, you may want to stay away from it for now, and crypto and NFTs in general. That said, if you like the cutting edge, then DeFi might be the place for you.