If you’ve been following cryptocurrency news for the past few months, there’s one word that keeps coming back — DeFi, also known as decentralized finance. As the name suggests, DeFi aims to bridge the gap between decentralized blockchains and financial services.
The original purpose of bitcoin hasn’t changed; it’s a crypto asset that lets users transfer money digitally without any bank in the middle. During the early days of bitcoin, people claimed that the blockchain could replace banks altogether.
But retail banks provide a ton of services beyond payments. If you have a bank account, it’s unlikely that you only use it to store, receive and send money. You may have a credit card, a savings account, a loan, some shares, etc.
That’s why developers have been looking at ways to port financial services to blockchains that support smart contracts. Some blockchains, such as Ethereum, EOS or Tezos, let you add a script to a transaction. The script is executed when some conditions are met.
And this is a key element of DeFi — the financial product shouldn’t be managed by a central server. Everything happens on the blockchain. If you want to read the fine print of your financial product, you can look at the code on the blockchain directly.