What is decentralised finance (DeFi)?
DeFi stands for ‘Decentralised Finance’, a term introduced by the Crypto market. In summary, DeFi challenges the current financial structure and removes the ‘middle institution’ from any financial activities. It’s a p2p process managed by a project on the blockchain, and all transactions are recorded and managed as a smart contract. As a newcomer to the crypto market, this concept may be hard to grasp, so we recommend you research how; Bitcoin was first introduced. What is Blockchain? and What is a Smart Contract? Once you understand these essential elements, then DeFi will make sense.
In basic terms, with DeFi, the investor can:
- Invest their stablecoin (pegged on USD) and earn interest with no contract period.
- Stake their coin/token holding to the project to earn interest.
- Borrow against their stable coin or well-known cryptocurrencies, i.e. BTC, ETH etc., and invest the borrowings to grow their portfolio further.
- Contribute to the liquidity of p2p pools (for others to borrow or exchange) and earn transaction fees.
And much, much more…
For anything known to exist in the mainstream financial world, DeFi offers the same options with new products introduced daily, i.e. insurance, dispute resolution etc.
DeFi does not have a credit rating system where you borrow beyond your crypto asset size – maybe that’s a good thing?