Author: AbuVlad

Decentralized Finance is a term that describes financial products and services (e.g. lending, trading) that can be delivered without a centralized financial intermediary (e.g. bank, exchange) acting as a trusted counterparty to manage its delivery

For example, in traditional lending, both borrowers and lenders needed the bank as a trusted counterparty:

• Borrower: Needs a place they know will lend/find a lender for them
• Lender: Needs someone they trust will pay back their debt

Defi products eliminate the need for a trusted counterparty by using smart contracts and Dapps:

• Smart contracts: Protocols built on the blockchain that define the how the product functions. They can be thought of as the back-end of a product. The protocol's code and activity are transparently available on-chain for any user to audit
• Dapps (Decentralized Applications): Software built on-top of the smart contract to interact with it. Can be thought of as the front-end interface of a product

The revolutionary potential of DeFi comes from the following advantages:

• Cost efficiency: A bank's main cost item is headcount. DeFi protocols do the job with minimal headcount
• Transparency: Code can be audited by anyone able to read it. Protocol holdings and transactions are publicly available to anyone interested