Decentralised finance, or DeFi for short, the decentralised banking and financial system that is made possible by cryptocurrency technology. Centralised finance, CeFi, is constituted by a middle man, in which we place our trust, for example a bank or an institution. We trust this actor with our hard earned cash and as a result this middleman has power over us, or at least has power over our funds for a time. While funds rest with this centralised body we must trust that them to keep our funds safe. Of course we know that banks practice fractional reserve banking, along with God knows what other practices.
The removal of this trust from our banking system is the reason for the emphasis placed on decentralisation in the crypto space. The easiest way to do pretty much any of the things that are being done in crypto is to centralise the process, but then inevitably, some Zuck figure will become dominant over that centralised entity and become the crypto overlord. So, great pains are taken to bake in decentralisation in (most) crypto protocols. The scalability trilemma, explains why it is not a simple straightforward task to enact this decentralisation. Even Bitcoin, which is elegant in it’s implementation of technology, has made sacrifices for the implementation of uncompromising decentralisation, and issues with transaction speeds, transactions per second, immutability of transactions, and difficulty of building on top of Bitcoin, all exist because of this commitment to decentralisation.
Although Bitcoin is very effectively decentralised, smart contracts enable DeFi to fully function, making Ethereum and other blockchains far better suited to implement DeFi protocols than Bitcoin. (Although having said that Defi implementations do exist on Bitcoin.) There truly is a wide variety of different DeFi protocols across blockchains, and this variety makes it even more important to fully understand where you are placing your hard earned cash as an investment. There have been plenty of examples of failed DeFi projects where investors have lost money, or where extremely high APY dropped off to zero and created bagholders. If it seems too good to be true it probably is.
Anyways, to make your crypto journey even easier, here is the DeFi list fren.
