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Apr 4, 2022

Decentralized Finance (DeFi)

Decentralized Finance, or DeFi, is a movement based on the idea that financial structures should be free from the control of any single entity, government, or third party.

What Does Decentralized Finance (DeFi) Mean?

Decentralized finance is a relatively new financial system that works on a decentralized blockchain framework. It uses smart contract technology to ensure its users access to almost all financial products and services which are typically carried out through centralized or traditional financial set-ups. With DeFi, these are all carried out without the need for any centralized authority. 

The main goal of DeFi is to enable faster, streamlined transactions and enhanced accessibility to financial services. It is also the idea that powers the formation of decentralized autonomous organizations (DAOs).

What Are the Benefits of DeFi?

Distribution and control of power is the main differentiator between decentralized finance and more traditional, centralized financial models. Centralized finance gives power to limited ruling parties, be it governments, banks, or other organizations. 

Decentralized finance distributes this control among the masses. It works with a dispersed and secured ledger, the same blockchain technology used by cryptocurrencies. You can read our guide about the differences between centralized finance and DeFi

Limitations of DeFi

While it does offer considerable benefits over a centralized financial system, all is not rosy in the world of DeFi. It's good to remember that it is, after all, relatively new, and has several drawbacks.

  • Scalability: A limited number of transitions can be carried out at a given time, considerably fewer than the amount of transitions centralized finance is capable of processing simultaneously.

  • Lack of predictability with high market volatility: Any instability in the blockchain automatically translates to choppy waters for decentralized finance and decentralized autonomous organizations

  • Vulnerability to rug pulls, attacks and scams: As with any emerging phenomenon, there are many malicious actors looking for vulnerabilities to exploit.

DeFi Use Cases

The use cases for decentralized finance reimagine many of the limitations imposed by CeFi. Some of these include:

  • New monetary banking services such as stablecoins, NFTs, and smart contracts that don’t require any intermediaries to authenticate transactions

  • Lending and borrowing platforms that provide peer-to-peer and pooled lending options

  • Empowering and facilitating financial mechanisms, such as DEXs, tokenization platforms, derivatives and predictions markets

  • Yield farming and liquidity mining to enables new investment opportunities

  • Applications called DApps, which are used to process transactions on the blockchain

  • Empowering DAOs to perform tasks such as collecting resources and managing assets, without the limitations of CeFi

To read up more comprehensively about DeFi, click here.