DeFi: The Basics

Editor’s Note: Please see the glossary at the end for all terms highlighted in sea green found in the order that they appear.

Technological innovation has a habit of kick-starting disruptive movements across the global economy. And one of the reasons why we believe that decentralized finance, or DeFi, has such vast disruptive potential is that it offers inclusion and innovation.

Participants in economies where the financial system promotes regulated inclusion are fortunate to have relatively easy access to capital markets, savings, borrowing, lending, and other financial functions. However, financial access is a relative luxury and not equal to all, especially in developing economies. Traditional finance, being tied to centralized entities and intermediaries, offer permissioned entryways to financial inclusion. The merger of finance and technology into fintech has opened doors to new participants by simplifying front-end applications. But fintech’s underlying infrastructure still relies on the existing centralized models and functions.

Enter DeFi, which is designed to solve those problems. With the rise of smart contract blockchains that host programmable applications, developers built DeFi decentralized applications (dapps) to provide a permissionless, global financial platform for users, by users. DeFi eliminates the need for intermediaries like financial institutions while transferring the power, cost savings, and operational effectiveness to users. It offers financial inclusion in a transparent, secure, and efficient ecosystem.

What to Know About DeFi and How It Works

• How was DeFi born? Smart contract innovation allowed developers to bring financial utility to dapps within smart contract blockchains.
• What is DeFi? DeFi is a decentralized, open-source, and user-owned financial umbrella. DeFi is an ecosystem of composable applications, free of traditional financial intermediaries, for money markets, loans, asset management, digital liquidity channels, and digital ownership.
• Who can participate in DeFi? DeFi is open to all. A non-Know Your Customer (KYC) cryptographically-derived public key allows users around the world to permissionlessly engage within DeFi dapps. The peer-to-peer nature of distributed ledger technology facilitates global value exchange.
• Where is DeFi today? DeFi user adoption continues to grow as its utility expands, helped by rising developer activity intent on innovating new ways to engage with financial infrastructure.

The Rise of DeFi

The Bitcoin network offered the first glimpse of what decentralized finance could be. Bitcoin allowed users to control and exchange value via a peer-to-peer network rather than by relying on financial intermediaries, which set the initial blueprint for a decentralized financial movement.

In 2013, at just 19, programmer Vitalik Buterin published the Ethereum whitepaper in which he introduced a novel, general-purpose, Turing-complete blockchain network that allows developers to…