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. DeFi is commonly overloaded to also represent centralized providers of such blockchain-based services (aka CeFi).
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). DeFi operates through Smart Contracts running most popularly 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). UniSwap is an Ethereum-based Decentralized EXchange (DEX) that allows anyone to swap ERC-20 tokens.
BlockFi is one example of a U.S. regulated CeFi provider. Other CeFi providers include Coinbase and Voyager. Whereas TradFi 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 TradFi. For example, TradFi 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 TradFi-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.
