DeFi aims to be a peer-to-peer replacement to, and expansion of, all activities of the legacy financial services industry. By removing middlemen DeFi opens up participation on both sides of that market to individuals for the first time, services become permissionless, and processing times and fees are greatly reduced.
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“DeFi”, or decentralized finance, has come to encompass all financial services blockchain projects. The majority of these are happening on Ethereum, since its smart contracts allow for code to govern the activities that make DeFi possible.
Since user actions on DeFi are mediated by smart contracts, all you need is a wallet address on the blockchain of the project you want to interact with - there’s no account registration or paperwork to fill out.
Smart contracts enable trustless exchange of assets. One person can send their side of a trade to a smart contract, and if the other person fails to meet their obligation, the smart contract simply cancels the exchange, returns the funds that it’s received, and no one loses their assets.
This functionality can be scaled out to facilitate direct payments, decentralized currency exchanges (DEX), lending, and other financial operations. The limit is in the logic. If it's codable, it's possible - all without the need for a third party. These peer-to-peer interactions save time and money.
By removing overhead costs, DeFi participants are the sole beneficiaries of interest payments and other rewards generated by DeFi activities. You can put your money to work in DeFi by:
By participating in these DeFi activities, you can certainly earn more than the interest provided by a traditional savings account, but there’s ethical benefits too. You’re strengthening a system that’s leveling the financial playing field, and weakening the legacy institutions whose actions have caused financial crises and spawned movements like Occupy Wallstreet.
AMMs and lending pools apply crowd sourcing to cut out banks and hedge funds, and reduce operating costs while trading fees are given back to their users. AMMs also facilitate innovation by providing liquidity for new crypto assets that would not have been funded by traditional market makers.
Proof of Stake is a consensus mechanism for blockchains that decouples energy use from the security of the network. Participants pledge their tokens to validators who vote on what blocks should be added to the chain. Good actors are incentivized with rewards from fees collected from transactions incorporated into the valid blocks. By pledging your tokens to a vetted validator, you help to secure the network and earn interest on your money.
DeFi operates 24 hours a day, 7 days a week, and is accessible to anyone, anywhere in the world.