Ethereum Stack Exchange is a question and answer site for users of Ethereum, the decentralized application platform and smart contract enabled blockchain. It only takes a minute to sign up.
Sign up to join this community
What is DeFi? What are its core components? How to think about or picture "it"?
Some of the parts are tokens, stablecoins (tokens with specific properties to reduce its volatility), and exchanges, but there must be more and this simply seems to miss the bigger picture.
To help with scoping, maybe some explanations could be like How would I explain Ethereum to a non-technical friend?
Decentralized Finance (DeFi) is the movement that leverages decentralized networks to transform old financial products into trustless and transparent protocols that run without intermediaries.
Some may prefer to call DeFi as Open Finance, Distributed Finance, or EthFi(referring to the fact that at the moment most of existing DeFi products built on Ethereum.)
Also most likely we can count DeFi as a subset of Fintech.
Here is a great overview of DeFi core components:
I'd say that absolutely needed components for DeFi are:
Check defiprime.com for a list of defi products and defipulse.com for live stats.
DEFI is a decentralized financial system that is more efficient, faster, and fairer. DeFi is a smart contract platform. dApps are a critical DeFi ingredient. dApps are like traditional software applications except they live on a decentralized smart contract platform. The primary benefit of these applications is their permissionlessness and censorship resistance. Anyone can use them, and no single body controls them. It gets popular because it solves too many problems:
In the centralized financial system, banks are controlling the money. When entities want to get a loan, the interest rate is determined by the banks. There are no barriers to access Defi.
There are about 2 billion people who are unbanked. So it is very hard for them to get a loan. but with defi, anyone can get loan.
Centralized financial system is expensive. Credit card companies charge businesses 2-3 percent for each transaction. The remittance fee is higher about 7 percent. Banks charge too many hidden fees.
international wire transfer is slow. Or, if you want to buy a house and you need to make a big transaction, it might take days to move the funds.
the centralized financial system is not transparent. You do not know the financial status of the bank, you put trust in bank. If anything goes wrong, you have a limited government protection and you do not how long it will take to get funded.
In a centralized financial system, since loans are expensive, if someone has an idea to start up a business, they might not be able to get loan so their ideas will be gone. And big businesses have always lower cost of loan.
In defi protocols, users can influence new products and their roadmap, along with critical features.
Stable coins are emerged to protect investors from volatility. If an investor places ETH into the Compound protocol to earn interest, for example, there is the possibility that an ETH price drop offsets all yield earned, leaving the investor with a loss. However, if the same investor uses a stable coin, such as USDC, the value of the underlying asset would remain stable so the yield would remain unaffected by crypto market volatility.
Instead of being 'mined' a stablecoin derives its price from the value of another asset. In short, a stablecoin is pegged to some other underlying asset. The three primary mechanisms are fiat-collateralized, crypto-collateralized, and non- collateralized stablecoins.
If you want, we posted an article about DeFi, you check it out whenever you want What is DeFi? Decentralized Finance Explained
