What Is DeFi?
DeFi is an abbreviation for Decentralized Finance. It refers to any financial system that operates on blockchain technology. By using decentralized networks, DeFi systems can easily transform traditional financial services like banking, borrowing, and lending into permissionless, transparent networks that can run without middlemen.
Decentralized Finance platforms typically run smart contracts based on the Ethereum blockchain.
A Closer Look at This Term
Traditional financial services are controlled by a central authority like a central bank that confirms all transactions. As such, all parties to a transaction must trust the intermediary, in this case, the central bank, to confirm the transaction.
DeFi platforms do away with financial intermediaries like central banks because they are anchored on transparent and trustless protocols that are decentralized. They are based on the principle that peers can confirm transactions without trusting a middleman. As such, they allow for faster and cheaper transactions.
This system promotes inclusive finance, where everyone can access transparent financial services regardless of their geographic location.
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