Decentralized Finance (DeFi) is a way to handle financial services, like borrowing, lending, or trading, without relying on traditional banks or financial institutions.
Instead, it uses blockchain technology (like Ethereum) to create a system where people can directly interact with each other to manage their money.
Keep in mind that DeFi is still a relatively new concept, and while it has the potential to change the way we handle money, it also comes with risks. It’s essential to understand how it works and be cautious when using DeFi services.
TradFi (traditional finance) relies on middlemen. You need to rely on a bank to send money, earn interest, and get a loan. Banks make money by charging borrowers higher rates for loans than they pay you.
DeFi relies on code. You can send money, earn interest, and get a loan from users directly through smart contracts that enforce the rules. Unlike banks, many DeFi protocols are actually owned by the users (remember the own part of web3? Read, Write, Own). Users of DeFi protocols are sometimes rewarded by receiving crypto tokens that represent ownership or governance rights.
Think of it like earning a company’s stock as you use its products.
Identity and access
As you can see, DeFi has both advantages and disadvantages compared to traditional finance:
Advantages include more transparency, greater access, and higher potential returns.
Disadvantages include higher risk associated with any nascent technology and industry.
You can use DeFi to send money to others, earn yield on your assets, provide liquidity / loans to others, acquire loans yourself, and much more. Visit our DeFi learning path to dive in and learn more if you’re interested.
In our next email, we’ll cover: “What is an NFT?”
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