Despite being one of the most impactful trends in the crypto and blockchain ecosystem, there is still much confusion about what decentralised finance (DeFi) is—so much so that Google searches for its definition surged 273% in 2019.

To help demystify DeFi, we’ve created this quick guide breaking down what it is, its implications, and how it can redefine the finance industry.

Defining DeFi

As implied by its name, decentralised finance (also referred to as open finance or distributed finance) refers to a revolutionary system that is being built on public blockchains. As reiterated in a previous Tokens.net post, cryptocurrency makes transacting more accessible, and DeFi adopts the same principle, except it takes things up a notch. DeFi’s eventual goal is to make every financial service—savings, loans, trading, insurance, and more—globally accessible, allowing anyone with a smartphone and an internet connection to transact with absolute ease.

As highlighted by Coin Telegraph, an estimated 1.7 billion people in the world lack access to financial services. While there are ongoing advancements in the infrastructure to generate wealth, there is very little progress when it comes to accommodating this disadvantaged population. With DeFi in place, everyone can access financial services and the products they need without intervention from intermediaries such as banks. Everything will be permissionless, transparent, and censorship-resistant.

The Implications of DeFi

The concept of DeFi is still nascent, but it’s already showing great promise, especially with its impact on Ethereum. For starters, DeFi is expected to mitigate Ethereum’s issues of scalability, a problem that has long plagued the blockchain. It reduces the risk of contentious forks that could throw off the whole system. More and more DeFi apps are already being built on Ethereum. If a part of the Ethereum threatens to fork, it must take all the popular apps on board, which requires painstaking efforts.

Speaking of DeFi apps or decentralised apps (DApps), a ton of them are already flourishing on Ethereum. Some DApps allow you to create stablecoins, take out a loan, lend money, earn interest on your crypto, and so much more. These DApps essentially perform the same functions that their traditional-financial-system counterparts do, but they are not managed by an institution, nor do they create issues with privacy because they’re available for anyone to audit. What’s more, they’re designed to serve a global audience, offer a flexible user experience, and boast interoperability, making it possible to integrate with other systems to create an entirely new product.

The Latest on DeFi

Many developments are happening in the world of DeFi, the latest of which is Compound’s replacement of admin rights in its smart contracts with community governance. As the second most prominent DeFi lending protocol in the ecosystem, this move allowed the company to go all-in on decentralisation.

Before this change, the Compound’s leadership could still manipulate the lending of the DApp funds. With the recently announced switch, control is passed to decentralised community governance, meaning all changes introduced moving forward will be decided not by the builders but by the users.

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Author: Jennifer Birch
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