DeFi is shorthand for “decentralized finance,” a way of conducting financial business utilizing peer-to-peer networks, blockchains, and other developing technologies to eliminate intermediaries and central oversight. In a traditional financial system, banks and various third parties like credit card companies facilitate essentially every step of the movement of money from one person to another.
DeFi aims to allow for these transfers to occur in a secure way but without the scrutiny—and the costs, privacy concerns, and occasional delays—associated with these third parties.
Tools of DeFi
DeFi has emerged as a focal point among cryptocurrency enthusiasts as the Ethereum network and its powerful smart contract capabilities have developed. Proponents of DeFi utilize various systems to lend, borrow, and trade cryptocurrencies. These include individual tokens—and particularly stablecoins—as well as exchanges, networks, and decentralized apps.
DeFi Protocols
One reason Ethereum and smart contracts have been crucial to the development of DeFi is because of protocols. DeFi protocols are simply codes, procedures, and rules which govern the systems utilized in DeFi. Through DeFi protocols, participants in the ecosystem are able to trade, lend, stake tokens, and much more. These protocols must be accessible to all wallets so that anyone participating in the DeFi system can follow the same set of rules.
By and large, DeFi protocols are autonomous programs encoded into smart contracts either on Ethereum or a similar blockchain ecosystem. Most protocols attempt to identify and improve upon one or more traditional financial processes. As an example, a DeFi protocol could aggregate data from various decentralized crypto exchanges in an effort to consolidate trading and liquidity pools in order to make transacting more straightforward for users.
Understandably, many DeFi protocols use highly complex procedures in an effort to simplify
