DeFi stands for decentralized finance and is a financial system that does not involve banks and other intermediaries. DeFi is established using a system of distributed ledgers for implementing blockchain technology in carrying out financial transactions.1
How does DeFi work?
In a traditional financial system, a bank or other institution facilitates a transaction and levies fees to the sender and sometimes the receiver. The process is not only costly, but may be time-consuming, as well. The intermediary also needs access to more in-depth information from the customer, especially for larger transfers. To eliminate such complexities, DeFi was established. There is currently no regulatory involvement in such a financial system, as the nodes within the system are responsible for validating each transaction.
DeFi allows for peer-to-peer interaction, which means that one can access borrowers or lenders in real-time. The participants’ privacy is also generally preserved, as anonymity is a feature in this system.
Despite much fanfare in recent years, DeFi is still in its early stages and the space can be considered risky for investors due to a lack of regulation.
Example
In comparison to traditional lending, DeFi lending is simpler because it doesn’t involve complex paperwork. Using algorithms, one can match a lender to a borrower within a short period using DeFi apps.
Source
1. Decentralized Finance (DeFi) Definition Investopedia.
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