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September 28, 2022

What is Decentralized Finance?

When it comes to finance, what exactly is decentralized? What does that mean for the future of our financial system? These are important questions to consider as we move into a new era of digital money and asset ownership. In this blog post, we'll take a closer look at decentralized finance and how it could shape the future of our financial system.

What is Decentralized Finance?

Decentralized finance—often called "DeFi"—refers to the shift from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on cryptocurrency blockchains. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments. Now with over $13 billion worth of value locked in Ethereum smart contracts alone, decentralized finance has emerged as the most active sector in the blockchain space, with a wide range of use cases for individuals, developers, and institutions.

How Does DeFi Work?

As its name suggests, decentralized finance is powered by decentralized technologies that run on decentralized infrastructure. By deploying immutable smart contracts on blockchains, DeFi developers can launch financial protocols and platforms that run exactly as programmed and that are available to anyone with an Internet connection. Because these protocols are open source, they can be built upon and improved by anyone in the community. This permissionless model of innovation has spurred rapid iteration and growth in the DeFi space, with new protocols and products launching at a breakneck pace.

What are the Benefits of DeFi?

From 24/7 availability to global accessibility, decentralized finance protocols offer a number of advantages over traditional financial institutions. By operating on popular blockchains such as Solana and Ethereum, DeFi protocols can be used by anyone in the world with an Internet connection—providing access to financial services for everyone from underserved communities to developed nations. In addition, because they run on smart contracts, DeFi protocols can be accessed 24/7 without downtime or maintenance breaks. And because they're built on open-source infrastructure, anyone can audit or contribute to their development.

The emergence of decentralized finance represents a paradigm shift in our understanding of money and assets—and it has the potential to upend traditional financial systems entirely. With its wide range of use cases and benefits, decentralized finance offers a compelling alternative to centralized alternatives for both individuals and institutions alike. Whether you're looking to trade digital assets or earn interest on your crypto holdings, decentralized finance protocols make it easy to do so in a safe and secure manner. So if you're wondering how you can get involved in DeFi, there's no time like the present to start exploring all that this sector has to offer!

Jacques Potts - Sr. Marketing Manager at Ledgible and experienced financial author, marketer, and crypto expert. His work has been featured on The Street, Project Serum, FirstTrade, and Invstr.
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