What is DeFi?

Decentralized finance, commonly referred to as DeFi, is a revolutionary take on developing an alternative to the current global financial infrastructure. At its essence, DeFi would provide those who have been historically left out of the banking system and bring millions, if not billions, into the 21st century.

DeFi is only possible with help from the blockchain network’s distributed ledger, just like cryptocurrencies. To handle transactions and ensure the blockchain network functions correctly, decentralized applications (dApps) are necessary, free from a single point of control.

Every financial transaction is recorded on the blockchain, forming “blocks,” which are verified by consensus. These blocks are then “chained” together using the transaction information that details the historical accounts for every exchange.

This consensus method means that most nodes (the computers within the blockchain network) must agree to validate the transaction for successful verification. The owners of these computers receive an incentive every time they verify a transaction, usually in crypto.

All information within the blockchain is permanent, meaning no one can tamper, change, or alter any transaction information. This capability gives blockchain a layer of trust and transparency, providing users with security every time they complete a transfer.

Ultimately this would be made possible thanks to using blockchain technologies (usually Ethereum) and smart contracts, effectively cutting out any need for intermediaries or go-betweens. Much like Web3, DeFi prides itself on being entirely decentralized, which for many in the financial sector is almost like flipping the world upside down and keeping it there.

It’s important to point out that there are a lot of mentioned terms, such as Web3, blockchain technology, cryptocurrencies, and DeFi. To simplify all these terms, think of Web3 as the way information is dispersed and shared, cryptocurrencies are the medium of exchange (think of it like money), and DeFi is the decentralized financial infrastructure. At the same time, blockchain technology is the foundation making everything possible and much more.

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