Decentralized Finance – Definition and how does DeFi works?

Manish Kothari
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isVerifiedExpertAuthor is a Zfunds Verified Expert
Manish Kothari


DeFi is a global and open financial system built for the internet age - an alternative to a system that is tightly controlled, opaque and held together by years old processes and infrastructure. It gives you visibility and control over your money. It gives investors exposure to global markets and alternatives to local currency or banking options. DeFi products open up financial services to anyone with internet connectivity and they are largely maintained and owned by their users. So far billions of USD worth of crypto has flowed through DeFI applications and it is booming every day. 


DeFi is a collective term for financial services that are accessible to anyone who can use cryptos - anyone with an internet connection. With this, the markets are always open and there are no authorities who can block payments or create hindrance in anything. Services that were previously slow and at risk of errors by humans are safer and automatic now that they are managed and handled by code that anyone can scrutinize and inspect. 

There is a booming crypto economy out there, where we can lend, earn interest, borrow and more. Crypto savvy Argentinians have used DeFi to escape crippling inflation. Entities have started streaming their employees their wages in real time. Some folks have even take out and paid off loans worth millions of dollars without any need of personal identification. 


One of the best way to witness the potential of DeFi is to understand the problems that exits in todays finance:

  • Lack of access to financial services can prevent people from being employable
  • Some people are not granted access to use services or set up a bank account
  • A hidden charge of services is our personal data
  • Centralised and government authorities can close down markets at will
  • Trading hours are limited
  • Money transfer can take time due to processes.
  • There is a premium to the services as intermediaries need their cut


Conventional FinanceDeFi
Money is held by companies Money is held by you only
Investors have to trust companies to manage their moneyInvestors control where the money goes and how it is spent
Transaction can take time and delays can also happenTransaction in minutes
All the activities are tightly blended with your identityOpen to anyone
Market can not remain active all day longMarkets are open 24*7
Financial institutions and banks are closed books. We can not ask to see their history, managed assets and so on.It is built on transparency - anyone can look at the data and inspect the working of the system.


DeFi uses crypto and smart contracts to provide services that do not need intermediaries. In the present scenario’s financial world, financial institutions act as guarantors of transaction. This gives them immense power because the money flows through them. Moreover billions of people around the world can not even access a bank account. In DeFi, a smart contract replaces the bank or financial institution in the transaction. A smart contract is a king of ethereum account that can keep funds and can refund/send them based on certain conditions. No one can change that smart contract when it is live - it will always run as programmed. 


There is a decentralized alternative to most banking and financial services. But crypto also creates opportunities for creating financial products that are relatively new. Following is an ever growing list:

  1. Send funds around the globe.
  2. Stream money around the globe
  3. Borrow funds with collateral
  4. Borrow without collateral
  5. Access stable currencies
  6. Trade tokens
  7. Start crypto savings
  8. Buy insurance
  9. Manage your portfolio


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