What Is Decentralised Finance (DeFi)?

Decentralised Finance (DeFi)—or open finance—is a term used to describe a suite of crypto projects that are decentralising financial services. To build DeFi projects, developers make use of technologies such as blockchain and smart contract.

Why DeFi?

At present, the financial services industry relies on institutions and banks to serve as a trust layer. With the help of law enforcement, these trusted intermediaries keep the financial system running. To make it worth their while, we pay them fees.

With DeFi, there’s no need to trust a middleman. Their role is unnecessary thanks to a blend of cryptography, smart contracts and blockchain. Compared to the current financial services industry, DeFi promises to be more accessible, interoperable and efficient.

READ: What is a Decentralised Exchange?

DeFi Use Cases

In DeFi, the number of trustless protocols and decentralised applications (dApps) is increasing at a healthy rate. The majority of these are built on the Ethereum blockchain. This is mainly due to Ethereum’s strong developer community, advanced smart contract scripting, and supporting infrastructure (e.g., wallets, exchanges, developer tooling).

Below are some of the most promising DeFi sectors and use cases to date.

  • Lending and borrowing
  • Stablecoins
  • Decentralised exchanges (DEXes)
  • Derivatives
  • Insurance

READ: What are Stablecoins?

Lending and borrowing is arguably the most active component of the DeFi ecosystem. Examples of DeFi lending and borrowing solutions include Compound and Maker. You can earn interest on Ethereum DeFi lending platforms by depositing cryptocurrency.

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