DeFi is an open, global financial system developed for the internet age, as opposed to an opaque, tightly controlled system kept together by decades-old infrastructure and practices. It provides others with access to and control over your money. It also exposes them to global markets and provides them with alternatives to their local currency and banking options. DeFi products allow anyone with an internet connection to access financial services, and they are mostly owned and maintained by their customers. DeFi applications have already processed tens of billions of dollars in cryptocurrency, and the number is growing every day.

DeFi has the potential to solve several problems that exist within the current financial ecosystem. Some of these problems include: people being denied access to set up a bank account or use financial services; inability to work or receive payments due to lack of access to financial services; the hidden cost of a person’s personal data; markets being shut down arbitrarily by governments and centralized entities; trading hours being restricted to the business hours at a specific time zone; internal human operations causing money transfers to take days; and financial services commanding a premium because they require a “cut.”

In many respects, Bitcoin was the first DeFi application. Bitcoin allows people to truly own and manage wealth while also allowing them to send funds anywhere in the world. It accomplishes this by creating trust between a big group of people by helping them to agree on a ledger of accounts without the requirement for a third party. Anyone can use Bitcoin, and no one has the power to change its rules. The laws of Bitcoin, such as those that create scarcity and openness, are encoded into the technology. It’s not like traditional finance, where governments may issue money and firms can shut down markets, devaluing your savings.

Ethereum is built on similar rules. The rules can’t be changed by a person, and everyone has access, just as with Bitcoin. Additionally, leveraging smart contracts also makes this digital money programmable, allowing it to do more than just store and distribute value.

At the moment, most financial services have a decentralized alternative. However, Ethereum opens the door to the creation of a whole new suite of financial instruments. This is a constantly growing list. At the moment, people can send and stream money around the globe, access stable currencies, borrow funds with collateral, start crypto savings, trade tokens, grow and manage their portfolios, fund their ideas, and buy insurance.

Ethereum, as a blockchain, is designed to conduct transactions worldwide in a secure manner. Just like Bitcoin, Ethereum makes transmitting money all over the world as simple as sending an email. Users simply enter the recipient’s ENS name (such as bob.eth) or their wallet account address, and their payment is usually sent directly to the recipient in minutes. A user requires a wallet first in order to send or receive payments. Additionally, users can also use Ethereum to stream money. This allows them to pay people easily, providing them with immediate access to their funds. If a user doesn’t want to send or broadcast ETH because of its volatile value, they can use stable coins– Ethereum’s alternative currencies.

Volatility in cryptocurrencies is a problem for many financial products and everyday spending. Stable coins were developed by the DeFi community to solve this problem. Their value is fixed in relation to another asset, usually a popular currency such as the US dollar.

You can use two methods to borrow funds from decentralized providers: peer-to-peer, wheresomeone borrows from a specific lender directly; and pool-based, where lenders provide funds or liquidity to a pool that borrowers can draw from. There are quite a few advantages to using a decentralized lender. Firstly, today, everything about lending and borrowing money centers around the people involved. Before lending, banks must determine whether a person is likely to repay a loan. Decentralized lending operates without requiring either participant to reveal their identity. Instead, the borrower must put up collateral, which will be immediately transferred to the lender if the loan is not repaid. Some lenders even accept NFTs as collateral. An NFTfunctions as the deed to a one-of-a-kind item, such as a painting. This allows users to borrow money without having to go through a credit check or reveal personal information. Secondly, people who use a decentralized lender have access to currencies deposited all over the world, not only those held by their selected bank or organization. This increases lending availability and lowers interest rates. Moreover, borrowing allows consumers to get the money they need without selling their ETH (a taxable transaction). Instead, they can secure a stable coin loan with ETH as collateral. This provides people with the necessary cash flow while allowing them to maintain their ETH. Stable coins are tokens that don’t vary in value like ETH and are therefore preferable when people need cash.

Lastly, flash loans are a type of decentralized lending that allows people to borrow money without putting up any collateral or disclosing any personal information. They are currently inaccessible to people who aren’t tech savvy, but their existence hints at what may be possible in the future for everyone. Flash loans operate on the principle that the loan is obtained and repaid in the same transaction. If it is not repaid, the transaction is treated as if it never happened. Liquidity pools hold the money that is often used (big pools of funds used for borrowing). If they aren’t being utilized at the time, someone can borrow them, do business with them, and pay them back in full.