DeFi, or decentralized finance, is a term used to describe financial services that are built on public blockchains, primarily Ethereum. With DeFi, you can do many of the same things that traditional banks support, such as earning interest, borrowing, lending, buying insurance, trading derivatives, and trading assets. However, DeFi is faster and doesn’t require paperwork or a third party.
DeFi is important because it expands on the basic premise of Bitcoin, creating an entire digital alternative to Wall Street without the associated costs. This has the potential to create more open, free, and fair financial markets that are accessible to anyone with an internet connection.
The benefits of DeFi include being open, pseudonymous, flexible, fast, and transparent. Users engage with DeFi via software called dapps, most of which currently run on the Ethereum blockchain. There is no need to fill out an application or open an account, making it easy and accessible for anyone.
Some of the ways people are engaging with DeFi today include lending, getting a loan, trading, saving for the future, and buying derivatives. However, there are downsides to DeFi, including fluctuating transaction rates on the Ethereum blockchain, high volatility, and the need to maintain your own records for tax purposes. Regulations can also vary from region to region.