Defi is the abbreviation for Decentralized Finance, which means something like decentralized finance or decentralized financial sector. The term is fairly general and not very clear-cut, as it includes all financial applications that are not, as in the traditional financial sector, under the control of a central actor. Such a central middleman is, for example, a bank, stock exchange or insurance company that, as a central point of contact and control point, regulates and controls all transactions and services that take place. In decentralized crypto exchanges applications, this task is taken over by the network of participants, which is based on the “rules of the game” in the protocol. As a rule, this is a blockchain protocol that allows decentralized organizations through so-called smart contracts to enable. Smart contracts are digital contracts that are embedded in program code and can therefore replace human or manual transactions.
These decentralized applications, called dApps for short, enable the same services to be presented in the financial sector as we are used to from traditional financial intermediaries. This can be, for example, trading in securities or granting and drawing on loans. Most Defi applications are currently based on the best-known smart contract platform Ethereum.
How can I participate in Defi applications?
In addition to the degree of decentralization, the criterion that the protocols are open source, i.e. everyone has the opportunity to build their financial services based on the protocol, is important. Unless you intend to program something yourself, you do not need any special IT knowledge as a user. There are no entry requirements for Defi, anyone can participate. Defi offers a wide format for testing business areas, applications and opportunities. That is why Defi is not yet the playground for the general public. Various concepts and applications have already left the experimental stage, others are being tested, and new ones are being developed and tested. The idea of ”decentralized finance” is in motion in practice.
The advantage of personal responsibility can also be a disadvantage, as you are responsible for storing the tokens yourself. A lack of regulation or a lack of consumer protection can have a detrimental effect on the legal security of decentralized financial transactions; at the same time, speculation and bubble formation can spread particularly quickly.