Decentralized Finance
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Decentralized Finance Overview
- What do we mean by Decentralized Finance?
Decentralized finance offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain. Amongst other things, DeFi allows users to buy and sell assets and financial services as a form of investment or financing without middlemen.
Broadly speaking, Decentralized Finance refers to the emerging blockchain-based ecosystem of permissionless and transparent financial services. It's a significant advancement brought about by blockchains, smart contracts, and oracles. DeFi allows users to access financial applications similar to those in traditional finance but without requiring the involvement of centralized intermediaries. These applications run on open-source protocols on decentralized networks, providing global permissionless access, and they can interoperate with other applications to enable more advanced financial products.
Popular Apps on Decentralized Finance
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Frequently asked questions
DeFi operates on public blockchain infrastructure, where anyone with an internet connection can access a global, decentralized, and peer-to-peer financial system without needing to entrust a custodian with their assets. The logic underlying DeFi applications is enforced by a secure and deterministic environment, providing transparency around the rules governing the system. A key principle of DeFi is permissionless composability, which allows various components in the DeFi ecosystem to be combined to create a structure that is greater than the sum of its parts.
One example of a DeFi application is stablecoins, which are digital tokens on the blockchain that represent fiat currencies like the U.S. dollar. They aim to maintain a 1:1 peg with the asset they represent through various mechanisms. There are fiat-backed, decentralized, and algorithmic stablecoins, each with different methods for maintaining their peg.
Lending protocols in DeFi, such as Aave and Compound, are open-source platforms that allow for the creation of money markets. Users can lend and borrow assets directly on the blockchain, providing liquidity and earning interest in return. These protocols offer significant improvements over traditional financial services.
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