DeFi is a decentralized financial network based on cryptocurrencies and smart contracts that allows users to participate in the global economy without the need for banks or investment brokerages. Users can use DeFi to send money worldwide, store their money using crypto wallets, earn higher yields than traditional banks, and borrow and lend on a peer-to-peer basis. The network also offers insurance services via its Etherisc subsidiary.
DeFi is a promising new technology, but it also poses some risks. Among these risks is the potential for bad actors to take advantage of the system and scam investors. Ozair says that DeFi projects may not be as transparent as they are supposed to be, and that investors will be at risk of algorithmic fraud if there is no central authority checking the algorithms. This is why banks are increasingly wary of this new technology.
Many DeFi products are built on the Ethereum network, which allows them to share a common architecture and interoperability. As a result, DeFi products are interoperable, and users can lend and borrow tokens on one platform, and exchange interest-bearing tokens on another. Since Ethereum is based on a shared ledger, there is no central authority or owner of the tokens.
DeFi also offers smart contracts for lending cryptocurrency without an intermediary, sidestepping many of the risks associated with traditional lending. For example, lenders can take back funds if a borrower defaults on repayment. Another use for DeFi is as a savings account. It could offer higher interest rates than traditional bank savings accounts, and payments might be made daily, weekly, or monthly.
DeFi users access their funds through a secure digital wallet. They can initiate transactions through smart contracts, which require that both parties agree to certain conditions. For example, smart contracts can be designed to automatically send funds to a particular account on a predetermined schedule. These smart contracts are secure and cannot be altered.