DeFi is short for decentralized finance. DeFi is a term used to describe the many financial products which cryptocurrency helps to enable without the need of centralized entities such as banks or governments. Can you think of a financial product that DeFi will disrupt?
DeFi means that individuals can interact with each other directly, in a peer-to-peer fashion, across an unlimited number of financial products. Smart contracts, or self-executing software code, allows for all of this to be possible. Loans are a common financial product which DeFi will transform. Typically we’ve taken loans out at the bank and used our houses (or other assets) as collateral, soon we’ll be able to take out a loan in minutes via decentralized platforms using our crypto holdings as collateral. Cool, right?
When we think of the traditional financial system, we have many different entities moving our money behind the scenes. Each of these entities are controlled by either a company, bank, or government. Think of the number of entities involved in this simple transaction: buying a stock in your favorite company. In this transaction, your money moves from your bank account into a brokerage account, the brokerage secures the stock on your behalf via the stock exchange, registers it for your possession, and all the while this activity is regulated by various financial agencies of government. There’s likely 4 different entities involved in that transaction. In a decentralized setting, you get to be your own bank, you get to acquire the digital asset (stock) via a decentralized exchange (brokerage), you get to hold and own the digital asset via your private keys, and all of this is registered publicly on the blockchain. Not a single third party was required in this decentralized alternative, and it was all executed via code. This is where the future of finance is headed, and it’s decentralized for all to use.