DeFi is an acronym for the term decentralized finance, which usually refers to Ethereum-based digital assets and financial smart contracts, protocols, and distributed applications (DApps). Simply put, it is financial software built on the blockchain.

To get a feel for the products and services that exist in the Ethereum DeFi ecosystem, you can refer to the DeFi ranking published by defipulse, which tracks the real-time value locked in DeFi smart contracts around the world.

Over the years, computers have disrupted nearly every industry. Each innovation builds on the previous one, so digital products and services become more complex. Through technology, we meet the needs of the world. From digital assistants to smart homes, programs now impact every aspect of our daily lives. So why is there an exception for money?

What does decentralized finance do?



To better understand DeFi, we should first look at how traditional finance came about. It feels like money has been around since we were born, but it's not.

Human beings originally aimed at bartering. But with the formation and development of human society, our economy also develops. We invented money to make the exchange of value easier. Subsequently, money helped introduce new innovations and higher levels of economic productivity. But progress has not come without a price.

Historically, central banks have issued the currencies that underpin our economies. Central banks and financial institutions manage and regulate the supply of currency in circulation. As our economies grow in size and complexity, central governments gain more power from them as more people trust them.


We believe that central banks will not print more money overnight. You trust the bank to store your funds safely. And, when it comes to investing, you can trust your assets to financial institutions. By giving them control of your money, you hope to make a profit. But looking at financial systems around the world, the sad truth is that the power that comes with that trust doesn't always pay off.

We often have little say in how companies handle our investments, or even how power institutions manage the economy. In most cases, investors only get a portion of the return from the risk these institutions take.

DeFi tries to build something different


Decentralized finance aims to create a financial system that is open to everyone in the world and minimizes people’s reliance on centralized financial institutions. Technologies such as the internet, cryptography, and blockchain provide the tools to jointly build and control financial systems without the need for a central financial institution.

There is a saying in the blockchain world: "Don't trust, verify." Because with the blockchain network, you can personally verify all transactions that take place on the blockchain.

DeFi puts everyone in control of their finances


Almost all DeFi applications are built on the Ethereum blockchain, the most popular programmable blockchain in the world. Ethereum is a blockchain network that maintains a shared ledger of digital value. Instead of a central authority, the participants that make up the network control the issuance of ether (ETH), the network’s native cryptocurrency, in a decentralized manner.

Developers can write applications on Ethereum to create, store and manage digital assets (also known as tokens) on the blockchain. These are called smart contracts or decentralized applications (DApps). They are contracts or agreements executed by the Ethereum blockchain. Or, just an application or script that runs programmatically on the Ethereum network. You can build complex irreversible protocols without a middleman.

Decentralized finance has the opportunity to build a more resilient and transparent financial system. Anyone with an internet connection can access and interact with smart contracts based on the Ethereum blockchain. Many smart contracts are built to be open source and interoperable with existing smart contracts. Thus, users can verify the code of the smart contract and choose the service that best suits them.

What are some examples of popular DeFi applications?


DeFi has many different products and services, some of which you may find familiar to existing financial services, but decentralized.

Arguably the most popular and fastest growing industry in DeFi is lending platforms. Similar to a bank, users can deposit money and earn interest from other users who borrow their assets. However, in this case, the asset is digital and the smart contract connects the lender with the borrower, enforces the terms of the loan and distributes the interest. This all happens without trusting each other or a middleman bank. And, thanks to the transparency provided by blockchain, lenders can earn higher returns and gain a clearer understanding of risks by cutting out middlemen

Tokens called stablecoins are also important to the DeFi ecosystem. You might feel like all cryptocurrency prices are on a roller coaster ride. However, stablecoins are tokens designed to hold a specific value, usually pegged to a fiat currency like the U.S. dollar. For example, DAI is a stablecoin pegged to the U.S. dollar and collateralized on the Ethereum (ETH) chain as a digital asset. For each DAI, $1.50 of Ethereum is locked in the MakerDAO smart contract as collateral.

Another popular DeFi application is the so-called decentralized exchange, or DEX for short. DEXs are cryptocurrency exchanges that use smart contracts to enforce trading rules, execute trades, and securely handle funds when necessary. When you trade with a DEX, there is no centralized exchange operator, no registration, no authentication or withdrawal fees.

DeFi is like Lego bricks

With Lego bricks, you can start with a bunch of small bricks. It's up to you how to put LEGO bricks together into something new. The same goes for smart contracts. With every new project, product or service launched on Ethereum, you will have an extra money Lego in your collection. By piecing together the existing components of DeFi, it is possible to autonomously combine, modify or create powerful new financial instruments through multiple layers of smart contracts.

cDAI is the perfect example of money Lego bricks in action. Compound is the money market, or in other words, Ethereum's lending service. When you provide DAI to Compound, you receive cDAI tokens, which represent both your DAI in Compound and any interest you earn on the loan. Since cDAI is a token, you can send, receive and even use cDAI in other smart contracts. Money Legos comes into play: ETH is put into MakerDAO to create DAI tokens, DAI is given to Compound, and cDAI tokens can be used in other DApps.

For example, you can exchange ETH for cDAI on a DEX and immediately start earning interest just holding cDAI. And since you choose how to interact with smart contracts on the blockchain, you can use a DEX aggregator like DEX.AG to compare and trade at the best prices across all popular DEXs in seconds.

Decentralization may make a difference

When it comes to DeFi services, the degree of decentralization varies. Not everything can or needs to be completely decentralized.

As mentioned earlier, stablecoins are popular in DeFi. However, not all stablecoins are as decentralized as DAI. Many of these are actually tokens representing fiat currency deposits. For example, for each USDC token, a 1:1 collateralization of $1 is issued in a bank in the United States. In theory, you can "tokenize" or create a token to represent any real-world asset. Here things become less black and white because while you can transact, send and receive these tokens on the blockchain, you cannot completely eliminate the need to physically manage or redeem real-world assets.

For example, buying a house on the blockchain. Say someone marks the deed as their home, puts it on a decentralized exchange, and you buy. Without real-world legal protection, you cannot force the person to leave his home to complete the transaction, whether or not you have a digital contract. So there is still a need for legal settlement of disputes.

In short, if technology is divorced from the real world, there are limitations, and the boundaries of DeFi begin to blur.

DeFi won't stop anytime soon


If you believe that you will buy digital currency in the future, then you can explore what DeFi can provide. Ethereum has become the blockchain of choice for many companies building their financial products. Every day above, more and more businesses or individuals are starting to build more and more DeFi applications...