Leoglossary: Decentralized Finance (DeFi)

1 mo (edited)
1 Min Read
172 words

Decentralized Finance (DeFi) is an emerging technology that alters how the financial system operates.

Utilizing distributed ledger technology (DLT), DeFi eliminates the need for banks or any 3rd party to be involved in reaching consensus with transactions. This is accomplished by block producers validating transactions and writing them to an immutable ledger known as blockchain.

Funds are held in a digital wallet instead of a bank. Many financial institutions are trying to get approval to act as custodians of cryptocurrency funds. This is not DeFi since it adds the 3rd party into the equation.

DeFi is challenging the traditional financial system by disempowering middlemen and gatekeepers while empowering individual users. This comes in the form of establishing peer-to-peer (P2P) systems for exchanges, lending, and borrowing. Smart contracts are an essential part of the process.

It is the smart contract technology which provides the instructions (code) of how assets are to be managed. The contract dictates the happens on the DeFi platform, not a company.

Posted Using LeoFinance Beta