Decentralized Finance, or DeFi, is a consortium of peer-to-peer financial services that uses blockchain technology to eliminate the need for intermediaries. Understanding DeFi is easier when comparing the services offered to traditional finance.
To understand DeFi, we must understand the traditional finance system. Traditional finance is heavily integrated in the lives of many people. Credit cards, savings accounts, student loans, mortgage loans, insurance, and stock trading are all part of the traditional finance system, where money is used to enable many different complex interactions and financial transactions. However, with each of these financial services, there are gatekeepers, whether it the company or a regulatory agency, that give preferential access to some or outright deny the use of these services to others. A bank can deny you service because of nationality, freeze your funds, or create different rules for your access compared to others in ways that are unexplainable.
The clearest answer to how DeFi works is that it can replicate and potentially replace the traditional finance system with similar financial products and services. The Genius DEX could become an alternative to Nasdaq for trading assets. DeFi lending protocols like MELD could become an alternative to SoFi or Fannie Mae. DeFi aims to even the playing field for these services through lower costs and increasing accessibility.
DeFi dApps, or decentralized applications, are built on top of blockchain technology using smart contracts. Smart contracts are self-executing agreements in code. The code is written using programming languages such as Plutus for Cardano dApps or Solidity for Ethereum dApps. By using smart contracts, the need for intermediaries such as clearinghouses, banks, or insurance companies are not needed. The interaction and settlement between all parties are determined by smart contracts, which users can review beforehand and willingly agree to. The transactions can be recorded on public blockchains like Cardano, making DeFi transactions secure and immutable.
For example, you have 100 ADA and want to buy some GENS and GENSX tokens. You first find a centralized exchange (CEX), like Kraken or Coinbase, that allows you to trade your ADA for GENS or GENSX. After going to the CEX’s site, you realize you must fill out multiple forms and provide personal information such as passport number, driver’s license number, and address. You may feel uncomfortable giving out this information. Even if you can provide all that is requested, your nationality or country of citizenship could still cause you to be restricted from using the CEX.
Next, you find out that you can also trade ADA for GENS or GENSX on the Genius DEX, which is a DeFi dApp built on top of the Cardano blockchain. Once you go to Genius DEX's official website, your only requirement is having your ADA in a compatible wallet to interact with the DEX. No identifying information is needed to make a trade. Now you can successfully trade your ADA for GENS and GENSX tokens!
In the future you could apply for a mortgage loan using DeFi lending dApp? Or you can apply for a student or personal loan. You could also lend out your savings for interest or trade tokens utilized for the Metaverse, Telecommunication services, or stablecoins on the Genius DEX. DeFi will potentially grow to affect everyone as the worldwide adoption of crypto continues.