DeFi stands for Decentralized Finance, which is a financial system where financial products are recorded on a blockchain.

Decentralized nature

Cryptocurrencies often have a decentralized nature. With bitcoin, for example, there is no central party that approves transactions, as this is done by independent nodes. However, buying and selling bitcoin and other cryptocurrencies is still often done through central brokers and exchanges. Depending on the country where these central parties operate, they must comply with regulations. For example, there is the Know-Your-Customer principle and people on a sanctions list are not allowed to be customers.

Not dependent on trust

Decentralized Finance is a system in which all kinds of financial services are also decentralized. Examples that are often mentioned are insurance and contracting. Crypto trading can also be done decentrally. This is then done on a DEX (Decentralized Exchange). The main difference between centralized and decentralized services is that centralized services are built on trust. With a decentralized system, no trust is needed, as everything can be controlled.

Dangers of DeFi

The world of DeFi is still quite new. An important aspect of DeFi is that rules and decisions are predetermined. In the traditional financial sector, there are many bodies that supervise banks, for example. In the event that a bank fails or pursues bad policies, one must rely on the regulator to intervene. In DeFi, there are no such regulators. This is a conscious choice, after all: Don't trust, verify. A possible danger here, however, is that consumers are poorly protected. Because rules are laid down in advance, the possibility exists that a situation arises that needs to be anticipated. For example, if a DEX is hacked. Without a regulator it is probably not possible to get money back.