Cryptocurrency explained: What is decentralised finance?

Caroline Bowler

Decentralised finance, or DeFi, is one of the fastest growing areas in cryptocurrency.

While Bitcoin challenged the idea of electronic currency, DeFi looks to reimagine our broader financial infrastructure.

Investment in DeFi services has flourished in 2020. At the start of the year, DeFi’s total locked-in value was $US662.5 million. Today, that value is $US11.19 billion.

DeFi is an umbrella term for decentralised financial services. The sector develops new platforms for banking, trading, and insurance without intermediaries or paperwork. Therefore, service fees are lower than traditional providers. This is attractive for many people.

In that context, ‘decentralised’ refers to the distributed nature of the network. These networks are made up of many connected computers in numerous locations.

This differs from a centralised network such as those used by banks, which run their services through a single, central computer system.

DeFi’s rise to prominence is thanks to the Ethereum blockchain.

Why Ethereum? Firstly, it is programmable: anyone can create decentralised applications (dApps) that run on the Ethereum blockchain network. Consequently, the vast majority of DeFi projects are Ethereum based.

Secondly, its network is active: Ethereum has one of the largest communities of participating programmers, developers, and users.

Thirdly, its network supports smart contracts: a fundamental part of DeFi.

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