Decentralised finance
Also called: DeFi · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
Decentralised finance (DeFi) means financial services such as lending, borrowing and trading that run through smart contracts on blockchains. A smart contract is computer code that carries out a deal automatically. There is no bank, broker or exchange in the middle. Anyone with crypto and an internet connection can use DeFi. Supporters see it as innovation that could widen financial inclusion. The risks are large:
- There is no KYC (Know Your Customer identity checks), which helps money laundering.
- Users can lose money to hacks and code bugs.
- No regulator protects consumers.
Example
A user deposits crypto into a DeFi lending platform as collateral and borrows stablecoins (crypto-assets pegged to the US dollar) against it. The code sets the interest rate automatically. If the collateral's price falls too far, the code sells it off with no human decision.
Don't confuse with
- Cryptocurrency: the digital asset itself, such as Bitcoin. DeFi is the set of financial services built with such assets.