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What is Decentralized Finance (DeFi)?

Updated: Apr 16


Alican Karataş  is the author of the article titled: what is decentralised finance

Publication date: 01.08.2023




This post may contain affiliate links, which means I may receive a small commission, at no cost to you, if you make a purchase through a link Decentralized Finance, commonly known as DeFi, provides users with decentralized financial services through Smart Contracts on a blockchain. In particular, Smart Contracts are encoded contracts using cryptography, where two parties agree upon specific rules and conditions. These contracts automatically execute transactions when the conditions are met.


How does decentralized finance work?


DeFi is built on the Ethereum network, which is the second-largest cryptocurrency after Bitcoin. It operates with the feature of Smart Contracts. This way, it enables trading, investing, borrowing, lending, earning interest, making payments, and engaging in financial agreements. Of course, all these happen without the need for intermediaries, authorities, or centralized entities. It is a decentralized concept where no third-party groups are involved, and transactions are conducted solely peer-to-peer (P2P).


decentralised finance

What is peer-to-Peer (P2P)?

Peer-to-Peer (P2P): It is a concept that enables communication on a network through a decentralized connection between computers or users. It facilitates the exchange of any data, files, etc. among peers without the need for a server or central authority.


How does P2P work?

Let's explain this with a simple example that maybe we do every day. In our current financial system, imagine that we want to send money to someone. We go to our mobile banking, complete the necessary procedures and send the money. However, the money doesn't directly go to the recipient. Before that, our bank needs to approve the transaction, and then the recipient's bank also needs to confirm it. Yes, this happens smoothly and quickly, of course. But here's the main point: When we make the transaction, intermediaries and institutions come into play.


In the decentralized finance (DeFi) system, once the sent money completes network verification, it reaches the recipient. So, during this process, no institution or organization intervenes, and the transactions are entirely decentralized.

What about other features?


We have just mentioned sending money. What about other financial transactions like borrowing, lending, earning interest, and making payments? In some Decentralized Finance platforms, we can earn interest by locking our assets. This means that we can perform financial transactions similar to what banks do. For example, we refer to earning interest, borrowing, and lending, within this concept. So, is DeFi trying to take over the traditional financial system and establish a completely decentralized finance system? No, DeFi doesn’t have such a goal. The primary purpose of DeFi is to create an alternative to the current financial system. Also, integrate with the traditional financial system to improve and enhance the world of finance, making it more efficient. If you are interested in buying or trading cryptocurrencies that utilize De-fi, make sure you use Binance.



 

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