What Is Decentralized Finance?
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services.

Some of the key attractions of DeFi for many consumers are:

• It eliminates the fees that banks and other financial companies charge for using their services.
• You hold your money in a secure digital wallet instead of keeping it in a bank.
• Anyone with an internet connection can use it without needing approval.
• You can transfer funds in seconds and minutes.

Key takeaways

• Decentralized finance, or DeFi, uses emerging technology to remove third parties in financial transactions.
• The components of DeFi are stablecoins, software, and hardware that enables the development of applications.
• The infrastructure for DeFi and its regulation are still under development and debate.

Centralized Finance vs Decentralized Finance

Centralized Finance

In centralized finance, your money is held by banks, corporations whose overarching goal is to make money. The financial system is full of third parties who facilitate money movement between parties, with each one charging fees for using their services. For example, say you purchase a gallon of milk using your credit card. The charge goes from the merchant to an acquiring bank, which forwards the card details to the credit card network.

All other financial transactions cost money; loan applications can take days to be approved; you might not even be able to use a bank's services if you're traveling.

Decentralized Finance

Decentralized finance eliminates intermediaries by allowing people, merchants, and businesses to conduct financial transactions through emerging technology. This is accomplished through peer-to-peer financial networks that use security protocols, connectivity, software, and hardware advancements.

Decentralized finance uses this technology to eliminate centralized finance models by enabling anyone to use financial services anywhere regardless of who or where they are.

DeFi applications give users more control over their money through personal wallets and trading services that cater to individuals.

How Does DeFi Work?

Decentralized finance uses the blockchain technology that cryptocurrencies use. A blockchain is a distributed and secured database or ledger. Applications called dApps are used to handle transactions and run the blockchain.

In the blockchain, transactions are recorded in blocks and then verified by other users. If these verifiers agree on a transaction, the block is closed and encrypted; another block is created that has information about the previous block within it.

The blocks are "chained" together through the information in each proceeding block, giving it the name blockchain. Information in previous blocks cannot be changed without affecting the following blocks, so there is no way to alter a blockchain. This concept, along with other security protocols, provides the secure nature of a blockchain.

DeFi Financial Products

Peer-to-peer (P2P) financial transactions are one of the core premises behind DeFi. A P2P DeFi transaction is where two parties agree to exchange cryptocurrency for goods or services with a third party involved.

To fully understand this, consider how you get a loan in centralized finance. You'd need to go to your bank or another lender and apply for one. If you were approved, you'd pay interest and service fees for the privilege of using that lender's services.

DeFi Currency

DeFi is designed to use cryptocurrency for transactions. The technology is still developing, so it is difficult to determine precisely how existing cryptocurrencies will be implemented, if at all. Much of the concept revolves around stablecoin, a cryptocurrency backed by an entity or pegged to fiat currency like the dollar.

The Future of DeFi
Decentralized finance is still in the beginning stages of its evolution. For starters, it is unregulated, which means the ecosystem is still riddled with infrastructural mishaps, hacks, and scams.

Current laws were crafted based on the idea of separate financial jurisdictions, each with its own set of laws and rules. DeFi’s borderless transaction ability presents essential questions for this type of regulation. For example, who is responsible for investigating a financial crime that occurs across borders, protocols, and DeFi apps? Who would enforce the regulations, and how would they enforce them?