DeFi is an abbreviation of decentralized finance, referring to a range of financial services that operate on public blockchain networks.
DeFi provides most of the same capabilities as traditional banks, such as borrowing, lending, earning interest, trading assets, purchasing insurance, and trading derivatives. However, it operates more quickly and efficiently, without the need for paperwork or third-party intermediaries. DeFi is accessible globally, operates on a peer-to-peer basis, and is open to all users.
Here are some characteristics of DeFi below.
Open: Users can gain access by creating a wallet without needing to apply for anything or open an account.
Pseudonymous: No personal information, name, or email address is required.
Flexible: Users can move their assets without permission, waiting for long transfer periods, or paying expensive fees.
Fast: Interest rates and rewards are updated regularly (as quickly as every 15 seconds), and can be considerably higher than traditional financial institutions.
Transparent: The full set of transactions is visible to everyone involved, offering more transparency than private corporations generally provide.
The following are some of the ways people are using DeFi today:
Lending: Users can lend out their cryptocurrency and earn interest and rewards every minute, not just once a month.
Obtaining loans: Users can obtain instant loans without having to fill out paperwork, including extremely short-term "flash loans" that traditional financial institutions do not offer.
Trading: Users can make peer-to-peer trades of particular cryptocurrency assets, similar to buying and selling stocks without a brokerage.
Savings for the future: Users can put some of their cryptocurrency into savings account alternatives and earn higher interest rates than they would typically get from a bank.
Buying derivatives: Users can make long or short bets on particular assets, similar to stock options or futures contracts.
What are the drawbacks?
Active trading can be expensive due to fluctuating transaction rates on blockchains.
Depending on which dApps are used and how they are used, investments can be highly volatile since it is a new technology.
Users are required to keep their records for tax purposes. Regulations can vary by region.