Discover the world of DeFi (Decentralized Finance) through LFi's introductory guide.
What is DeFi?
Decentralized finance, known as DeFi, is a term for financial services that work without relying on intermediaries, such as exchanges or banks, by using smart contracts on a blockchain.
Differences between DeFi and CeFi
DeFi is an open, digital monetary system that aims to democratize the economy by empowering people with access to the internet to use financial services and products. DeFi has the potential to provide financial services to the 1.7 billion unbanked people who do not have access to financial services.
The idea of decentralized finance is revolutionary, as the network is maintained and owned by the users themselves. Unlike centralized finance, also known as CeFi, DeFi is not dependent on centralized authorities for its operations, instead it uses smart contracts.
Smart contracts are programs running on the blockchain that can execute automatically, without a third party, when certain conditions are met. Once the smart contract is deployed on the blockchain, it is immutable and will run by itself, with little to no human intervention, although developers often maintain DApps with upgrades or bug fixes.
The code of DeFi projects is transparent and open on the blockchain, so it can be audited by everyone to understand the contract's functionality or to find bugs, thus creating trust between the code and the user.