Episode 26 - Decentralized Finance (DeFi)
Decentralized Finance is more of a field comprising platforms, standards, and applications focused on providing financial services using decentralized technologies.
Generally, when it comes to traditional financial services, we deposit savings, borrow money, buy insurance, etc. Most of the time we interface with financial institutions that govern the terms and and conditions of these services. The process is like a black box, too opaque considering money matters. We, as users, do not have a lot of control over how our money is being used by financial institutions.
Also, there are too many steps involved in the processes of applying for and receiving these services from traditional financial institutions.
What if these financial services became more transparent so that we have full visibility about your money? Also, what if you don’t have to fill a lot of forms just to get a small loan?
This is what DeFi intends to solve. It allows you to have visibility about your money, gives you a right to say where your money goes, makes many things possible without too much paperwork, and so on.
In simple terms, DeFi applications comprise value-bearing tokens, governance tokens, financial equations, and terms programmed in smart contracts. Using these smart contracts and DApps based on them, some users deposit their tokens in liquidity pools and others borrow them and pay interest. Similarly, other financial services like insurance are built on top of these smart contracts.