What is DeFi?
Finance is defined as the management of money and includes activities like saving, borrowing, lending, investing, budgeting, and forecasting. Finance can be seen as a societal tool to manage resources, risk, and rewards across space and time between entities.
Decentralized Finance (DeFi) is a term used for software built on programmable open-source blockchains using smart contracts. The aim is to transform traditional financial products into reliable, permissionless, transparent, and censorship-resistant protocols without centralized intermediaries. In some ways, DeFi protocol devs are writing firmware for scalable social collaboration and resource allocation. They extend the internet of value to more complex activities.
DeFi protocols share three interesting characteristics among many:
- Interoperability: The ability to share data and work with each other
- Composability: money legos, aka they be used in different ways to create new things
- Immutability: the inability for the core logic to be changed, allowing for more trust.
- Permissionless: the ability to interact with a protocol without third party permission
- Auditable: the history of its activities can be investigated by anyone
These properties give developers the ability to string together a series of protocols to create new and exciting applications.
DeFi also addresses issues in centralized finance related to:
- Centralized control
- Limited access and options
- Lack of interoperability and portability
- Lack of Transparency
- High cost
- Misaligned incentives
DeFi apps aim to increase choice, innovation, access, efficiency, speed, transparency, auditability and autonomy while lowering the costs of doing business and reducing systemic risk from too big to fail entities. Anyone with an internet connection can access DeFi Apps and protocols, extending the internet of information to the “internet of value”.
Additional Material
- Book: How to DeFi from Coin Gecko
- Article: Defiant: What is Decentralized Finance?
- Article: The Defiant’s Definitive Guide to DeFi
- Academic: Decentralized Finance (Federal Reserve) Yes, that Federal Reserve. Like, the real one!
- Video: Blockchain@Berkeley: DeFi
- Article: Are You Trading or Gambling? Important to know the difference before “investing” in DeFi!
- GitHub: DeFi Studies Collection of DeFi articles