DeFi, or decentralized finance, is a “permissionless” way of making transactions between two parties. These transactions use public blockchains that allow open access to validation and mining. They are also used to buy, sell and trade digital assets, like Bitcoin.
X
DeFi projects use dApps (decentralized applications) that anyone can develop and customize.
How DeFi Works
Like Bitcoin, DeFi’s software runs on a blockchain that makes every transaction immutable, tamper-free, pseudonymous and public. All nodes on the network accessed by dApp keep an accessible record of transactions between cryptographic addresses.
DeFi operates primarily on the Ethereum blockchain, but there are projects that run on other networks, such as Binance. Additional networks that include Cardano, Solana and Polkadot are also emerging as DeFi adoption grows.
DeFi eliminates the need for an intermediary or agent through smart contracts, while removing technological and regulatory barriers to entry.
Smart contracts are automated protocols that are fulfilled when certain conditions are met. Anyone with a network connection can make or enter into a financial transaction with another user through a smart contract.
This removes third-party and centralized controls, making financial transactions borderless and free from regulatory mediation.
Multi-chain protocols are likely to dominate the growth of DeFi, as users develop and execute smart contracts across different blockchains. dApps with cross-chain compatibility are also likely to emerge as favored instruments for financial transactions.
DeFi Benefits
DeFi is inclusive and borderless because any user can enter into an agreement and develop a smart contract through dApps. The tedious “Know Your Customer” process, used by banks and brokers to ensure transaction authenticity, is completely avoided. This allows anyone to enter into a financial agreement.
There are no mediating agents or middlemen, significantly lowering financial…
