DeFi stands for “decentralized finance” and refers to the ecosystem comprised of financial applications that are being developed on top of blockchain systems.
DeFi may be defined as the movement that promotes the use of decentralized networks and open source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.
Currently, the three largest functions of DeFi are:
Creating monetary banking services (e.g., issuance of stablecoins)
Providing peer-to-peer or pooled lending and borrowing platforms
Enabling advanced financial instruments such as DEX, tokenization platforms, derivatives and predictions markets
Within those three fields, there are several types of DeFi services. A few other examples of products and use cases include funding protocols, software development tools, index construction, subscription payment protocols, and data analysis applications. DeFi dApps may also be used for KYC, AML, and other identity management services.
Decentralized finance brings numerous benefits when compared to traditional financial services. Through the use of smart contracts and distributed systems, deploying a financial application or product becomes much less complex and secure. For instance, many dApps are being developed on top of the Ethereum blockchain, which provides reduced operational costs and lower entry barriers.
Summing up, the DeFi movement is shifting traditional financial products to the open source and decentralized world, which removes the need for intermediaries, reduces overall costs, and greatly improves security.