What Is Decentralized Finance (DeFi)?

Traditionally, almost all financial transactions involve an intermediary of some sort. When a customer makes a payment with a credit card, there are several parties involved. At multiple stages, third parties have complete oversight of the details of the transaction — and the ability to stop or decline it.

The DeFi movement is based on the idea that the financial system should not be controlled by monopolistic third-party providers of this sort, and that it should instead be decentralized. Some have political or philosophical reasons to hold this premise, while others simply believe that it will increase the efficiency and speed of transactions.

There is a large and growing range of players in the world of DeFi. Most major applications are built on Ethereum, which allows for the development of decentralized software. They make use of smart contract technology to minimize or completely remove the need for human or corporate gatekeepers.

DeFi providers are building alternatives to traditional financial services, as well as entirely new products. Existing DeFi applications include stablecoins, decentralized exchanges, and peer-to-peer lending services. DeFi is also the basis for the growing world of prediction markets.

Many commentators believe that DeFi heralds the future of financial services, and large bets are being made on DeFi start-ups. However, there have been several high-profile failures amongst DeFi players, and the field remains very much in its infancy.

DeFi should not be confused with embedded finance (sometimes known as invisible finance,) which is a movement within traditional financial services and fintech that aims to broaden access to banking and payments technology.