What is DeFi? A 3-minute guide to decentralized finance

In the world of traditional finance, the money supply is controlled by a small group of central banks who work with a small group of corporate banks to effectively keep the world running. While that system has, by and large, kept the lights on for the world economy for the best part of a century, it does have its limits. One of which is access. At present, roughly 1.7 billion people are not part of this network, through a variety of reasons; be it a permanent address, credit history or reliable enough banking infrastructure. Blockchain, and in particular, decentralized finance, or DeFi, has been touted as a possible solution to lowering the barrier of entry for those who had previously struggled to gain access to things like bank accounts and borrowing. 

Is decentralized finance or DeFi the beginnings of a new financial system – a financial system that’s global, permissionless, and internet-native? Is this the dream of programmable money realized? Let’s find out.

What is DeFi?

As a concept, DeFi is a system of open, permissionless, and interlocking financial products.  In practice, DeFi is an overlapping network of dapps and smart contracts built on Ethereum with a focus on financial applications such as borrowing, derivatives, exchanges, trading, etc. 

Who invented DeFi?

There is no single inventor of DeFi, but DeFi applications are built on top of Ethereum, which was invented by Vitalik Buterin. The current largest and first major DeFi application is MakerDAO, which was founded by Rune Christensen.

Did you know?

Prominent venture capital firm Andreeson Horowitz led multi-million dollar investment rounds in both Compound and MakerDAO–pillars of the current DeFi ecosystem.

What’s so special about it?

The excitement around DeFi centers on the concept of “money Legos”–the idea that anyone is able to create, modify, mix-and-match, link, or build on top of any existing DeFi product without permission. DeFi protocols are modular so they can stack on…

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