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Difference between revisions of "Decentralized Finance"
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Also known as DeFi is a collective term for financial products and services on | Also known as DeFi is a collective term for financial products and services on public blockchains enabling anyone to use financial services anywhere. Unlike [[centralized finance]], also known as CeFi, DeFi is not dependent on centralized authorities for its operations but uses [[Smart contract|smart contracts]]. "Smart contracts" are programs running on the blockchain that can execute automatically without a third party when certain conditions are met. Smart contracts allow developers to build far more sophisticated functional applications that goes beyond sending and receiving [[Cryptocurrency|cryptocurrencies]]. These programs are called [[Decentralized Applications (DApps)|decentralized applications]] (DApps). | ||
== Differences between DeFi and CeFi == | == Differences between DeFi and CeFi == | ||
* DeFi applications do not depend on centralized authorities for its operation, instead the DApp follows the rules written in the smart contract. Once the smart contract is deployed on the blockchain, it is | * DeFi applications do not depend on centralized authorities for its operation, instead the DApp follows the rules written in the smart contract. Once the smart contract is deployed on the blockchain, it is immutable and will run by itself with little to no human intervention (although in practice developers often do maintain the DApps with upgrades or bug fixes). | ||
* The code is transparent and open on the blockchain for anyone to audit. This allows anyone to understand the contract's functionality or find bugs thus creating trust between the code and the user. These smart contracts are typically [[open source]] and when verified can be found on the corresponding [[block explorer]]. | * The code is transparent and open on the blockchain for anyone to audit. This allows anyone to understand the contract's functionality or find bugs thus creating trust between the code and the user. These smart contracts are typically [[open source]] and when verified can be found on the corresponding [[block explorer]]. | ||
* DApps are designed to be open for anyone around the globe giving users access to the same DeFi services and products. | * DApps are designed to be open for anyone around the globe giving users access to the same DeFi services and products. | ||
* DeFi is | * DeFi is permissionless allowing anyone to create DeFi applications and use them. This provides users with full control over their assets giving a greater degree of freedom and individual responsibility for the management of funds. Users interact directly with the smart contract from their crypto wallet. | ||
* DeFi is | * DeFi is interoperable as new applications can be built or composed by combining other DeFi products to create entirely new products. | ||
A key concept for DeFi investors is to DYOR (Do Your Own Research) in order to ensure they understand what a DeFi protocol is, how it works, and the risks involved in using the protocol. | A key concept for DeFi investors is to DYOR (Do Your Own Research) in order to ensure they understand what a DeFi protocol is, how it works, and the risks involved in using the protocol. | ||