When ordering a Venti Vanilla Latte, skinny with oat milk and an extra shot, from your perspective, it’s a quick and easy transaction. You ask for a drink, the cashier subtly gives you side-eye, tells you the total, and you swipe your card. What you may not think about is that when you swipe your card, a financial institution must approve the transaction. When agreeing to use this financial institution, they can approve or pause any transaction and record it in their private ledger. With DeFi, you don’t have to think about financial institutions because there is no financial institution. The goal of DeFi is to eliminate middlemen from all transactions.
DeFi is decentralized finance and the umbrella term for peer-to-peer financial services. It uses public blockchains and operates primarily on Ethereum. DeFi uses smart contracts to create protocols for decentralized applications (dApps). Smart contracts are self-operating computer programs that perform a function when certain conditions are met, and they can perform the function through dApps.
Let’s break it down “Friends” style. Think of a smart contract as Rachel telling her bf, Ross, that they should take a break. Ross is a dApp now programmed with the protocol that he is on a break from Rachel and must defend his subsequent actions until the end of time. So when anyone confronts him about sleeping with someone else the same day, he is conditioned to say…DeFi is thankfully more logical and as easy as a smart contract stating when Jane receives 20 Eth, Elizabeth receives a Boss Beauties NFT.
DeFi is thankfully more logical and as easy as a smart contract stating when Jane receives 20 Eth, Elizabeth receives a Boss Beauties NFT.
Web3 is all-encompassing, while DeFi is a subsector of Web3. Web3 includes all the open, public, and decentralized blockchains, while DeFi operates through smart contracts primarily on Ethereum. TLDR: DeFi is the financial system within Web3.
Why choose DeFi over “Regular?” Fi?
“RegularFi” is centralized finance, or “TradFi,” run by third parties such as banking institutions. Aside from no annual or banking fees, with DeFi, you always hold your money in your secure digital wallet instead of storing it in a bank. Furthermore, DeFi is accessible to anyone with an internet connection so there’s no need to search for bank branches in your area. You can also get your transaction done in seconds or minutes rather than days.
What makes it decentralized?
In DeFi, there is no man behind the curtain. The foundation of DeFi is blockchain technology which uses computers and smart contracts, not a person, to authenticate transactions. These computers remove the need for centralized entities, like banking institutions and the people that work for them.