Defi Explained has been driving a cryptocurrency resurgence since

Introduction DeFi has been driving a cryptocurrency resurgence since 2020 with no sign of stopping. 

 But, what is DeFi and how does it work? Decentralized finance (commonly referred to as DeFi) is a

blockchain￾based form of finance that does not rely on central financial intermediaries such as brokerages or banks to offer traditional financial instruments. Instead, it utilizes smart contracts on blockchains, the most common being Ethereum. So, now that you know what it is, how can you utilize this new technology in your own business? That’s exactly what we’ll take a closer look in this special report.

DeFi Explained

As mentioned on the introduction page, DeFi stands for Decentralized 

Finance. 

This means that the financial services are carried out on a blockchain 

instead of through a brokerage or bank. 

In today’s financial world, financial institutions act as guarantors for any 

transactions. This gives them immense power over your money. 

Decentralized Finances are services with no central authority 

controlling them. Decentralized exchanges allow for peer-to-peer 

cryptocurrency transfers with no middleman. 

Forkast News calls it “the merger between traditional banking services 

with blockchain technology.” 

DeFi involves taking traditional elements of the financial system and 

replacing the middleman with a smart contract. 

This means DeFi needs a decentralized infrastructure to run on, like the 

Etherium blockchain. This blockchain is a do-it-yourself platform for 

DAPPS or Decentralized Applications. 

About 96% of DeFi protocols operate on Etherium, although a small 

number have migrated to competing blockchains because of increased 

speed. 

In decentralized transactions, the typical overseers of those 

transactions (banks, stockbrokers, government institutions, etc.) are 

replaced by blockchain. 

Because users don’t need to transfer their assets to the exchange, 

decentralized exchanges reduce the risk of theft from hacking of the 

exchanges. 

They’re also more anonymous than exchanges which require your 

identity on all transactions and can prevent price manipulation or faked 

trading volume.

DeFi’s goals are to utilize technology to remove intermediaries between 

parties in a financial transaction. Its components are stablecoins, use  cases, and a software stack that allows the development of 

applications. 

This infrastructure and use cases are still in development, though 

plenty of users have jumped on the DeFi bandwagon.

The Rise of DeFi

DeFi’s origin is often traced back to 2015, when a platform called 

MakerDAO allowed people to utilize cryptocurrency for collateral on 

their loans. 

DeFi, like the traditional cryptocurrencies, promises to do away with 

the unnecessary intermediaries like banks and stockbrokers. This 

viewpoint Is fueling the market lately.

Bitcoin was created in 2009 as an alternative to traditional finance (and 

financial authorities like banks and stockbrokers), but many limitations 

still exist. 

hile Bitcoin was meant to function like money, its functionality depends 

on a network of new central authorities that are acting much like the 

institutions they were meant to replace. 

Miners, node operators, wallets, and exchanges—these authorities are 

showing a distinct proclivity for acting just like banks and stockbrokers. In other words, Bitcoin doesn’t seem to be truly decentralized. 

A true decentralized system should be run by the people alone. 

Bitcoin has given us glimpses of this but has ultimately fallen short of its goal. 

With DeFi, there are no central authorities and protocol are run by 

smart contracts designed to eliminate foul play. 

The open financial network is trustless and decentralized, facts that 

have attracted many investors. 

DeFi’s Top Applications

Now that we’ve explained what DeFi is and what caused its rise in 

popularity, let’s look at some of the more notable applications for this 

protocol.

Decentralized Exchanges (DEXs): these are exchanges that operate 

without an intermediary. 

With a DEX, users can connect directly with one another to buy and sell 

cryptocurrencies. 

Any assets traded under a DEX are not held in escrow or in a third party 

wallet the way a centralized exchange would do. Some top DEXs 

include Uniswap, SushiSwap, and Curve. 

These exchanges are not as popular as centralized exchanges, which are 

operated by a central authority. Coinbase and Binance are examples of centralized exchanges and are 

custodial in nature because the buyers and sellers trust the central 

authority to keep their assets safe.

Lending Platforms: these use smart contracts in place of third parties 

like banks or stockbrokers. This allows lenders and borrowers to 

participate in an open system. 

Proponents of DeFi claim that these platforms are democratizing the 

entire financial landscape. 

In decentralized lending platforms, lenders can earn interest on 

cryptocurrency assets by loaning them out, while borrowers can assess 

liquidity without actually selling off those assets. 

With our traditional financial situation, you must offer collateral before 

you can get a loan from the bank. DeFi is similar, but borrowers have to 

offer assets which add up to more than the total loan in order to obtain 

that loan. 

Some of the top DeFi lending platforms include Aave, Maker, and 

Compound.