Decentralized finance—DeFi—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by the Ethereum blockchain.
From stablecoins, to lending and borrowing, to prediction markets, margin trading, payments, insurance, gaming, and NFT marketplaces, the DeFi ecosystem now represents an expansive network of integrated protocols and financial instruments worth more than $53 billion USD.
According to Consensys, fundamentally, each of these financial activities are different than their centralized counterparts for a few reasons:
DeFi applications are deployed as smart contracts, and the rules/logic of the application are written as code rather than enforced by companies and legal documents.
They are global and permissionless — with an internet connection, anyone can interact with them, whether in Almaty or Anchorage.
DeFi applications are composable. One DeFi smart contract or application can be used by other smart contracts and more complex applications, and nearly all DeFi smart contracts are public open-source code, which means that the entire financial system is being built in the open.
It may seem like money is already digital. You can take out your phone and use Venmo to send money to a friend. Decentralized finance takes this further — even the money itself is digital, programmable, and verifiable on Ethereum’s blockchain. One side effect of the Game Stop saga was that even casual observers were introduced to the centralized financial rails by which stocks settle, namly the DTCC causing brokerages like Robinhood to halt trading, drawing the outrage of retail investors left holding the bags.
One of the primary benefits of DeFi on Ethereum is that financial activity is transparent and settles in real time. Wallets like MetaMask allow for anyone in the globe to trade assets on decentralized exchanges like Uniswap. If someone else controls the financial rails, do you really own the assets you trade?