DeFi stands for Decentralized Finance. Decentralization is a process of distributing the power among all the participants of a system, without a central governing body. Today, the majority of traditional financial and state systems are centralized, and this approach is plagued with flaws. The main issue is that they have points of failure: a security breach or a central server/facility malfunction negatively affects the rest of the system.
Originally, cryptocurrencies were developed as a decentralized network that has no single point of failure, which makes it democratic, more stable and efficient compared with regular money.
The technology behind decentralization in Bitcoin and most other cryptocurrencies is called blockchain. Blockchain gives every user the ability to serve as a node that checks the validity of transactions.
What do users get from decentralization? Here are a few key advantages that users get from decentralized systems:
- No need to trust a central authority that might be incompetent, vulnerable to attacks, or even have ill intentions.
- Less censorship. Governments often restrict their citizens’ access to various websites and social media. Censoring traffic in a peer-to-peer network is much more difficult, because every package can be sent to every other node on the network, and they will relay this data further.
- Most of the applications on the network are open source. Anyone can copy some or all of the code, and create their own applications with it. The more decentralized products come out, the more advantages and opportunities open up for the network users.
- Proper economic incentives. Users who support the network get rewarded for it financially. The more support they provide, the more they are rewarded.
Of course, decentralized networks have their downsides too: they are usually slower to develop, have lower adoption rate, might be more expensive or have lower efficiency at the time of launch. However, most users agree that the end result is worth the effort.