DeFi is short for decentralized finance.

It’s another way to use money—without banks! 

DeFi allows people to borrow, lend, trade, and earn interest on their digital assets through blockchain technology. 

There is no need to open a bank account much less rely on traditional banks or financial institutions.

DeFi makes it possible to manage all transactions on the blockchain. 

Interested to know more?

This guide will help you understand DeFi in simple terms.

What Is DeFi, Really?

So you know what the word DeFi represents but what does it really stand for? 

You usually go through a bank or credit company when you want to save money, take a loan, or make payments. 

This is what we know as traditional finance or TradFi in crypto slang.

In DeFi, all these things can be done through smart contracts.

These are programs that automatically execute transactions without needing a middleman. 

Think of it like sending money to a friend, but instead of using a bank or app, the blockchain handles everything for you.

The biggest difference between DeFi and TradFi is that DeFi doesn’t have a central authority. 

Banks control regular finance, but DeFi is controlled by code. 

That’s why it’s called decentralized—there’s no single place or person in charge. 

With DeFi, anyone in the world can use financial services, even if they don’t have access to a bank.

How Does DeFi Work?

DeFi works on blockchains, like Ethereum, which is a kind of digital ledger that records all transactions. 

Ethereum in turn, was the very first decentralized smart contract platform.

Smart contracts are like robots that follow instructions exactly. 

Once they start, they finish the job without anyone checking on them.

So, DeFi uses these smart contracts to handle money without banks being involved.

People use DeFi apps, called dApps (short for decentralized applications), to perform tasks like trading crypto, lending money, or earning interest on their savings.

With DeFi, the system is completely open. This means anyone can access it as long as they have an internet connection and a crypto wallet. 

No need for approval from a bank!

DeFi Explained With Protocols And Possibilities

Let’s say you have some crypto, like Ethereum. 

In a regular bank, you might earn a small amount of interest on your savings. 

But with DeFi protocols, you can lend your crypto to someone else through a smart contract and earn a much higher interest rate! 

What are DeFi protocols you ask?

A DeFi protocol is a set of rules written into smart contracts. 

They automatically execute transactions when certain conditions are met. 

Some popular protocols include:

• Uniswap for trading crypto
• Compound for lending and borrowing crypto
• Aave for earning interest on your crypto

These protocols are designed to be safe, fast, and efficient.

So, what else is possible with DeFi?

DeFi also lets you:

• Trade crypto on decentralized exchanges
• Invest in new crypto projects through DeFi apps
• Buy insurance to protect your crypto
• DeFi Apps (dApps)

There are many DeFi apps, or dApps, available to use. 

These apps allow you to access different types of services, from trading to lending, and much more. 

Why Is DeFi Important?

DeFi is a big deal because it makes money more accessible. 

People who don’t have access to banks can still use financial services through DeFi. 

It also helps people control their money directly, without needing approval or paying high fees to big financial institutions. 

DeFi is all about using technology to give power back to the people.

It’s supposed to make financial services available to everyone, no matter where they live.

However, as well-meaning as DeFi’s unofficial mantra may be:

“Banking the unbanked.”

We must remember that lacking access to financial services is not the main reason most low-income groups are unbanked.

The reason why they are unbanked is plainly the lack of sufficient income.

They simply don’t have enough to open, much less maintain a bank account balance.

The little money they have is barely enough for day-to-day expenses.

This makes learning complicated DeFi platform procedures to “grow” their wealth a pointless exercise without sufficient capital.

Hopefully, DeFi can one day create solutions that generate more income possibilities for those in need.

What Is the Future of DeFi?

DeFi is growing fast! 

More and more people are using DeFi apps to trade, lend, and invest. 

As the technology improves, DeFi could become a standard way for people to manage their money.

There is so much possibility in the DeFi space.

In fact, as of late September 2024 according to DefiLlama:

The Total Value Locked (TVL) in thousands of protocols spanning 46 categories was only $88.66 billion.  

Its top 5 DeFi categories in terms of number of combined TVL (in billions):

• Liquid staking: $45.835
• Lending: $34.242
• Bridge: $30.832
• Dexes: $18.738b
• Restaking: $15.128

Now, the top 5 DeFi categories in terms of number of protocols:

• Dexes: 1,441
• Yield: 520
• Lending: 451
• Derivatives: 273
• Services: 202

According to Union Bank of Switzerland’s (UBS) 2024 Global Wealth Report, 92.2% of the world’s wealth stands at $432 trillion and is spread across 56 markets.

Could you imagine the wealth transfer that will take place as the number of TradFi products and services transition into DeFi?

Is DeFi Safe What Are Other Options?

DeFi can be safe if you use trusted platforms and follow best practices to protect yourself from cryptocurrency scams. 

But, because it’s new and growing, there are still risks. 

Now, if you’re not comfortable making a sudden shift from TradFi to DeFi then there is an intermediary option called centralized finance or CeFi.

These are crypto platforms that provide overlap between TradFi and DeFi.

Essentially, they serve as a bridge to the world of crypto investments and services while still maintaining a centralized framework overseeing its operations.

At the forefront of CeFi are the centralized exchanges like:

• Binance: the world’s leading centralized crypto exchange
• KuCoin: 1 out of 4 crypto holders are on it
• MEXC: low fees and user-friendly

Aside from trading crypto, these centralized exchanges or CEXs have other options like staking and investing in newly launched crypto projects.

CeFi also makes services such as borrowing, lending, and earning interest from your crypto possible through a Swiss-founded platform called NEXO.

They currently have over 7 million users, are available in more than 200 jurisdictions, and support beyond 75 cryptocurrencies.

Note, however, that even CeFi platforms are not risk-free despite having a centralized body managing it.

CEXs such as Mt. Gox can be hacked and what was once the 3rd largest in the world FTX, mismanaged leading to market crashes.

Borrowing and lending CeFi platforms like BlockFi filed for bankruptcy due to its connection to FTX as its second largest creditor.

Its competitors, Celsius Network and Voyager Digital also earlier filed for bankruptcy due to extreme market conditions.

As always, be diligent and always do your research.

Make sure you are using reputable CeFi as well as DeFi apps and protocols.

Can anyone use DeFi?

Yes!

In a nutshell, DeFi is like using money but without a bank. 

It gives people more control, freedom, and access to financial services like borrowing, lending, and trading. 

Thanks to Web3, DeFi is changing the way we think about money, and it’s all powered by smart contracts and blockchains.

Whether you’re lending, borrowing, or earning interest on your crypto, decentralized finance offers endless possibilities. 

True, the world of DeFi crypto is still developing.

But it’s opening up new ways to access financial services like never before.