📎What is DeFi?

Last updated: 2024-01-15

Decentralized finance (DeFi) is an emerging model for organizing and enabling cryptocurrency-based transactions, exchanges and financial services.

DeFi's core premise is that there is no centralized authority to dictate or control operations. It's a different approach than the traditional models of finance for fiat currency or centralized finance (CeFi) within the cryptocurrency markets. With centralized models, there is a core foundational authority that can influence and control the flow of transactions. The central authority often is also responsible for custody of assets.

With DeFi, there is no central authority. Instead, authority is distributed in a decentralized approach that is intended to provide more power and control to individuals. In the DeFi model, all transactions for buying, selling, loans and payments with cryptocurrency can occur without a central authority in a peer-to-peer (P2P) approach.

Custody of assets is a fundamental component of any financial model. In the DeFi approach, individual traders have control over the private cryptographic encryption keys, which enable custody of cryptocurrency assets. Financial transactions within the DeFi model are enabled with smart contracts that are often supported on Ethereum-based blockchains.

In a nutshell, banks are a centralized authorities. DeFi platforms are decentralized and trustless. Transactions are executed through smart contracts, eliminating the need for intermediaries.