What is DeFi?

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DeFi is the abbreviation of Decentralized Finance, which literally translates to “decentralized finance”. In fact, DEFI refers to decentralized protocols built on blockchain network (mainly Ethereum network) to build an open financial system with transparency, accessibility and inclusiveness.

DeFi, also known as “money lego”, is essentially permission-free and financial applications can be built, connected and exploited without restriction.

DeFi aims to use smart contracts to replace privileged or centralized institutions in the traditional financial field, so that users can enjoy financial services with lower cost and higher efficiency, and not only improve the operating efficiency of the entire financial system, but also reduce the operating cost. And a borderless financial system open to the world, so as to create an open, transparent and secure decentralized system where everyone can trade freely.

The DeFi platform has two major advantages over traditional centralized financial systems:

① Individuals with asset management needs can enjoy various financial services without trusting any intermediary, and the new trust depends on code reconstruction.

② All protocols are open source, and anyone can collaborate on them to build new financial products and accelerate financial innovation with network effects.

At present, DeFi has developed a variety of models, such as stablecoins, lending, decentralized exchanges, derivatives, prediction markets, insurance and payment platforms. We believe that in the future, under the new financial order created by DeFi, there will be more revolutions and innovations beyond imagination, and new trust depends on code reconstruction.

What impact would DeFi have on banks, too?

When we think of banking in the US, we usually think of major players such as jpmorgan Chase, Bank of America, Credit Suisse or Wells Fargo. But many are smaller community banks that don’t have the resources to implement expensive new technologies, causing them to fail and/or merge with larger banks. And this is where DeFi becomes incredibly powerful.

For example, your local credit union didn’t have the resources to implement and integrate expensive new technology to compete with the big banks, and now they don’t. They can be simply “plugged” into the open source DeFi protocol via a software development kit. In doing so, they tap into a network of open source developers who work for them, essentially for free. In our previous analysis of El Salvador’s decision to join the Bitcoin network in 2021, we mentioned the idea of “plugging in” open source financial technology.

The DeFi agreement will enable these smaller banks to offer new cutting-edge services at low cost. This could help level the playing field between large and small banks and offset the aggressive consolidation we have seen across the industry.

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What is DeFi?
 

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