What Is DeFi?

An introduction to the basics of decentralised finance (DeFi) and three projects suitable for beginners.

Cryptocurrency has evolved into much more than just a new version of digital cash or payments. It is a new financial ecosystem built using blockchain’s globally accessible, censorship-resistant, non-haltable, and autonomous platform.

Here we introduce the basics of decentralised finance (DeFi) and how users can unlock the full potential of their crypto.

Key Takeaways:

Short for decentralised finance, DeFi is an umbrella term for financial applications that do not have any central point of authority.

Decentralised applications (dapps) are a type of application that typically runs on a decentralised network; they are usually open-source software powered by smart contracts.

A decentralised exchange (DEX) is a peer-to-peer (P2P) marketplace where users can trade digital assets without the need for an intermediary.

What Is DeFi?

DeFi is an abbreviation of ‘decentralised finance’, which is software built on top of a blockchain that enables the creation of services much like standard centralised financial services — with the added benefit of decentralisation. This means that users interact with smart contracts and code rather than a central authority, such as a bank.

To illustrate, picture an individual who intends to lend their excess capital, and another who intends to borrow money for their business. Traditionally, they would have to go through a centralised financial institution, such as a bank. On top of that, the bank also has the power to decide whether the individuals are eligible for the services.

DeFi, however, eliminates the entire discussion process, as both the lender and borrower need only to interact with a smart contract, in which the terms and conditions of the transaction will have already been predefined. This transforms a rather demanding procedure into a decentralised one that is fair to all users.

Decentralised Apps (Dapps)

Decentralised apps (dapps) are autonomous and the backbone of DeFi. These protocols allow users to unlock the potential of DeFi by letting the smart contracts do the work, instead of a traditional central financial institution.

The challenge of a robust DeFi ecosystem is that it must incentivise the security of the platform, as well as its usage. To further understand a DeFi ecosystem, it’s important to understand dapps and how they play a major role in it.

How Do Dapps Work?

Dapps usually — but not necessarily — run on a blockchain, and their interfaces should look no different from any website or mobile app we use today. Dapps are able to provide the same support as a typical app, with the added benefit of enjoying all the advantages of decentralisation.

Dapps may run on top of existing public blockchains — for instance, Cronos or Ethereum, and any changes in data or information on a blockchain involve the participation of all nodes. Not a single entity has the authority to delete or modify the status or the information once it’s posted on the network. This transparency allows dapps, which are censorship-resistant and autonomous, the advantage of having no single point of failure.

Dapps typically have the following characteristics:

1. A public and decentralised blockchain (or P2P network) where data and information are kept
2. Cryptocurrencies
3. Open-source software
4. Community voting system where any changes are typically decided through a government system or a decentralised autonomous organisation (DAO)
5. No central point of failure; cannot be shut down due to the absence of a centralised server

What Is a Decentralised Exchange (DEX)?

One of the most common dapps is a decentralised exchange (DEX), which is a vital part of any DeFi ecosystem. It facilitates the core function within DeFi: the ability to exchange tokens. DEXs offer users a more decentralised service than a standard centralised exchange (CEX) because they are Automated Market Makers (AMM), which use liquidity pools to allow for trades.

In traditional order books, the CEX connects buyers and sellers to perform transactions, and users only have access to the tokens it provides. Whereas, on a decentralised exchange, users have access to virtually any token, since any user is able to provide liquidity.

To access dozens of DEXs in one app, download the Crypto.com DeFi Wallet.

Final Words on DeFi

In this short intro to DeFi, dapps, and DEXs, we introduced the new financial system that allows people to trade peer-to-peer, without the involvement of a middleman. DeFi is truly revolutionary and offers huge potential, especially for the roughly one-third of the world’s population that remains unbanked and excluded from the traditional financial (TradFi) system.

To learn more about our conventional financial system, check out these articles on the definition of money and the history of money.