Decentralized finance or DeFi is a global financial system that’s available on blockchains that are public — most often Ethereum.
“Decentralized finance stands for decentralized finance. In simple words it stands for self-custody finance. Unlike traditional finance where a company, bank, fund is responsible for your money, in DeFi no one but you has access to it,” explains Anton Mozgovoy, co-founder of Mover, a DeFi Savings platform.
Through this new emerging technology, Decentralized finance expands what’s possible with cryptocurrency and moves beyond just currency and creates sophisticated systems with an abundance of uses with the creation of applications, typically referred to as decentralized apps, or dApps, which we’ll get into later.
Decentralized finance was coined in 2018 by a group of entrepreneurs and Ethereum developers who wanted to open up finance applications from traditional systems. The abbreviation sounds like defy, which is intentional.
Pros and cons of Decentralized finance
The rising popularity of DeFi and other cryptocurrency make it seem like an attractive investment. But it’s important to understand what you’re getting into before taking the plunge, and understand the benefits and drawbacks.
“In Decentralized finance you hold your money, you control where your money goes and how it’s spent. DeFi is efficient, since everything is programmable, in a click of a button you can perform complex transactions,” explains Mozgovoy.
The accessibility factor can remove some barriers, but there are a number of cons to be aware of.
“Decentralized finance is new and experimental. Since everything is code, it can have bugs. Bugs lead to money loss or hacks. Decentralized finance is new and complicated,” says Mozgovoy. “User experience can still be rough. Learning curve is still steep, but it will change.”
How DeFi works
DeFi, previously referred to as “open finance,” takes out the middleman in financial transactions. So instead of having your bank or credit card issuer be the intermediary between you and a merchant when you make a purchase, you use the digital currency and have ownership of it to use directly. DeFi is primarily based on Ethereum, the top cryptocurrency next to Bitcoin.
How to invest in DeFi
If you’re interested in investing in DeFi, there are a number of ways to do it.
“To start in DeFi you need native currencies — like ETH, AVAX, BNB, FTM, MATIC and others — as every transaction will require gas. You can purchase those through various exchanges, wallets, and crypto services,” explains Mozgovoy.
It’s important to keep in mind that since everything is relatively new with DeFi and there is no governing body, be careful about what you invest in.
“In DeFi anyone can launch their own project, token, contract — that is why you should be aware of scams and low quality projects,” notes Mozgovoy. Aside from being aware of scams, in practicality, Mozgovoy states that with DeFi users can save, lend, or take part in derivatives and exchanges.
The financial takeaway
DeFi is an expansive financial ecosystem that strives to take out the middleman and allow for financial transactions between users. Currently, there is a lot of hype around DeFi and crypto. If you want to take part, be sure to understand not only the rewards but also the risks before getting started.