What is Decentralized Finance (DEFI)?

Decentralized Finance (DeFi) is a movement that enables users to use financial services such as lending and trading without having to rely on a centralized entity. These financial services are provided by decentralized apps (Dapps), most of which are deployed on the Ether platform.

While understanding how Ether works helps to better understand the ecosystem, you don't need to be an Ether expert to use the tools provided by DeFi. We'll discuss Ether further in the next chapter.

DeFi is not a single product or company, but a series of alternatives to institutions such as banks, insurance, bonds, and money markets.The DeFi Dapp allows users to combine the services they offer, opening up even more possibilities. Because of its composability, DeFi is often referred to as the money LEGO.

In order to use a DeFi Dapp, users typically need to lock collateral into a smart contract. The cumulative value of the locked collateral in the DeFi Dapp is often referred to as the total locked value. According to DeFi Pulse, the total locked value at the beginning of 2019 was approximately $275 million, while in February 2020, the value was already as high as $1.2 billion. The rapid growth in total locked-in value signifies the rapid growth of the DeFi ecosystem.

The DeFi ecosystem

DeFi is growing so fast that it would be impossible for us to cover all DeFi apps in this book. That's exactly why we have illustrated only a few selected categories and certain DeFi Dapps. We believe it's important and critical to understand what's in this book before beginners are introduced to the DeFi ecosystem.

These DeFi Dapps aim to revolutionize traditional financial services by eliminating the need for an intermediary party. However, it is important to note that DeFi is still in the early stages of experimentation and many of the programs are evolving with each passing day. Over time, DeFi will gain further momentum. At that point, DeFi will probably look completely different than it does now. Nonetheless, it's useful to know what DeFi looks like in its early stages, and you can still build on that expertise to take full advantage of what the DeFi Dapp has to offer today.

How decentralized is DeFi?

How decentralized is DeFi? It's not easy to answer this question. For simplicity's sake, we'll divide the degree of decentralization into three categories: centralized, semi-decentralized, and fully decentralized.

Centralized

Semi-decentralized (having one or more, but not all, of the above characteristics)

Fully decentralized