What Is DeFi?

DeFi is short for decentralized finance which generally refers to a novel industry of financial products and services that are built over Web 3.0 and are accessible to everyone, permission-less. It is an alternative to the traditional financial system which is opaque, centralized, very tightly controlled by dynastic oligarchs, and has been there for centuries now. The emergence of DeFi has been so strong that people already touted it to be better than traditional finance. This is because DeFi has managed to do what traditional finance and its institutions were not successful in doing- be transparent and exchange information with its users. DeFi allows for the exchange of trustable data across a system, mitigating these barriers to business financial services. At times, the transparency level in DeFi can be electrifying, especially if you had to deal with step-by-step approach in TradFi. Transparency also means building a product that is understandable with a very clear UX/UI, which makes user onboarding seamless.

In DeFi, a smart contract replaces the financial institution in the transaction. A smart contract is a type of self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. Today, a set of smart contracts have the capability of replacing certain financial intermediaries (e.g decentralized exchanges, lending institutions etc). Contracts can be coded to hold,  transfer or redeem funds based on certain conditions. No one can alter that smart contract when it’s live – it will always run as programmed unless encountered by some technical glitch or a bug. While Ethereum was the one that pioneered smart contracts in recent years, many protocols have been able to replicate the success that Ethereum once enjoyed monopolistically. The whole blockchain ecosystem is evolving to solve the inherent limitations of Ethereum. Many interesting solutions are emerging. Be it Polygon which is an interoperability and scaling framework for building Ethereum-compatible blockchains or L2s like Arbitrum, zkSync, Optimism; today DeFi users have a plethora of options to choose from. 

With DeFi the user exerts total control over their monies and also has visibility on how, when, and where it is being deployed without having to rely on a central institution like banks. Take an example of Rabby, Digital Wallet build for DeFi world. One of the key features of Rabby is that user gets a detailed and transparent view of each transaction before approving. 

Being borderless, DeFi opens up financial services to anyone in the world providing instant exposure to digital assets that are global in nature, something not possible in TradFi due to reliance on local currencies, laws, and banking options.  There are already numerous projects over various protocols that help users carry out all traditional finance functions such as lending, borrowing, taking long/short positions, earning interest, etc.  So far, tens of billions of dollars worth (USD 71.36 billion to be precise- while going to press) of crypto assets have flowed through DeFi applications, and that figure is only growing every day.

DeFi is booming! It is paving the way for a trustless and permissionless financial ecosystem, where the user doesn’t have to pay heavy fees, wait long hours and abide by rules created by others. If you are still at the fence, the time has come for you to jump it for good.