The world of Decentralised Finance (DeFi) is overloaded with complex jargon and technical terms, but at its core, it’s a way of exchanging currency or assets like stocks and shares that isn’t dependent on someone in the middle.
An exchange of anything can be complicated: there has to be a delicate negotiation to ensure that both parties involved are giving what they’ve promised and getting what they expect. This problem is usually addressed by getting a neutral third person to mediate the exchange.
Financial operations are no different. They rely on two parties wanting to exchange something, and someone in the middle to make sure it happens as they’ve agreed. Traditionally, these ‘someones in the middle’ have been concentrated — or centralised — in financial centres like London or New York.
This all changed when this ‘someone’ in the middle became a ‘something’ in the middle. The development of blockchain meant that an algorithm could check whether the terms of an exchange agreement had been met by both parties. Named a ‘smart contract’, it holds all the information needed to automate an agreement between a buyer and a seller. Importantly, blockchain isn’t owned by anyone. Smart contracts run self-sufficiently on a peer to peer network of computers around the world.
And so back to decentralised finance. Decentralised applications (DApps) are products that perform transactions mediated by these smart contracts. They’ve exploded in popularity as people have discovered just how powerful they are. As of September 2021, there was more than $90bn held in DApps.↗
The implications of decentralised finance goes far beyond the technical. By dispersing the power that was previously centralised, this model of finance allows anyone with access to the internet to make safe and secure transactions. This opens up a new financial world, especially for those people who have struggled to gain access before. On a global societal level, it untangles the ties between financial and political institutions which lead to injustice for those living in unstable or corrupt regimes.
We’re only at the very beginning of the timeline in the history of decentralised finance, but it has enormous potential and new services are being created↗ by the community every day. Beyond the everyday volatility of cryptocurrencies and the absurdity of novelty coins, decentralised finance will change the way the world exchanges.
CryptoSimple builds a portfolio of DeFi assets for you based on your financial goals. Find more information and download the app on our website.