De-centralized Finance (DeFi) provides traditional banking services (e.g. interest paying accounts, loans, credit cards, insurance, exchange, etc.) using a blockchain-based infrastructure comprised of crypto assets and stablecoins.
Examples of crypto assets include Bitcoin (BTC) and Ethereum (ETH). Stablecoins (e.g. USDT, USDC, GUSD) are pegged to local currencies (e.g. US dollar), and effectively provide a bridge to traditional finance (TradFi) or centralized finance (CeFi). DeFi operates through Smart Contracts running on the Ethereum blockchain network.
Smart Contracts are blockchain programs capable of automatically executing when certain conditions are met. The enable sophisticated functionality to be enabled and enforced through the blockchain network without centralized oversight. Such capabilities are referred to as De-centralized apps (Dapps).
BlockFi is one example of a U.S. regulated DeFi provider. Other DeFi providers include Coinbase and Voyager. Whereas CeFi offers interest accounts yielding less than 1% APY, it is not difficult to find DeFi interest accounts yielding 5%-to-10%+ APY. Of course, due to its relative infancy, DeFi does carry higher risks than CeFi. For example, CeFi bank accounts in the U.S. are federally insured up to $250K. DeFi deposits do not currently offer such assurance.
DeFi has potential to reach the traditionally (CeFi-) unbanked portion of the population globally by offering easier access, greater freedom and speed of transaction settlement, as well as hallmark blockchain security. Consequently, DeFi is well positioned to disrupt traditional banking infrastructure.