Cryptocurrency promises to make money and payments universally accessible– to anyone, no matter where they are from or who they are. Now with the development of Decentralized Finance, better known as DeFi or Open Finance that promises is taken to the next level. A global alternative to basically every financial service people are using today. Imagine loans, trading, savings and more, available to anyone with a smartphone and internet.
This is now a reality, thanks to blockchains supporting smart contracts. Smart contracts can be described as applications or programs running on a blockchain which are executed automatically when prescribed conditions are met. With smart contracts, developers are now able to build a far more extensive range of functionalities than just sending and receiving cryptocurrencies. Applications like this are called dApps, which stands for decentralized app. When a dApps offers a financial service like mentioned before we categorize this as DeFi.
There are some critical differences between these DeFi apps and regular financial service providers.
- At their core, operations of these businesses are not managed by an institution. Instead, the rules are written in smart contracts. When a smart contract has been launched on the blockchain, the DeFi dApp can operate with minimal to no human help.
- Permissionless to create and participate. Anyone is able to develop and launch a DeFi app, and anyone is able to use that app. Users do not necessarily interact with the party behind the dApp but directly with the code.
- Dapps are global — Whether you’re in Asia, Africa or even the South-Pole, you have access to the same services and networks. Although local regulations may have influence in the core DeFi apps are available to anyone with an internet connection.
- The code is transparent for anyone to audit. This thanks to the characteristics of blockchain technology. It is resulting in a new sort of relationship between the app and its user. Users are now able to understand and check functionalities.
- User experience — Not feeling the interface of a particular dApp? No worries — you can use a third-party interface, or build your own. Smart contracts are like an open API that anyone can build an app for.
- Interoperable — new DeFi applications can be built or composed by connecting other DeFi products like a puzzle.
After gambling and gaming, DeFi is now one of the fastest-growing applications of crypto. Being early days, users should always do research when deciding to use services or buy products. Like any computer code, smart contracts can be vulnerable to both unintended programming mistakes and malicious hacks.