What Does DeFi Mean in Crypto?

By Julia Cook
Published Aug 15, 2022 and updated Apr 17th, 2023

Decentralized finance (DeFi) is a broad concept that encapsulates all blockchain-based transactions, as it refers to any peer-to-peer transactions and cryptocurrency investments that occur on the blockchain.

Decentralized finance, frequently abbreviated as ‘DeFi’, refers to the move of the cryptocurrency community towards building a decentralized, blockchain based financial system. The basic concept is that DeFi platforms allow for financial services to be provided without the need for an intermediary such as a bank or other financial facilitator. This is possible due to all transactions being conducted by smart contract protocols on the blockchain. These are only concluded when they are approved by both address holders.

The Bitcoin blockchain was the first blockchain to utilize a DeFi protocol, as it allowed users to transact on a peer-to-peer basis online through their wallets. But there were many stories about people losing their wallet addresses or passwords, giving them to someone else in phishing scams, and so on.

This resulted in other types of wallets and then the creation of cryptocurrency exchange platforms developed to facilitate exchanges between parties. However, the earlier ones were centralized with connected wallets that were connected to the platforms, which led to exploitation and hacking problems. This eventually resulted in the implementation of decentralized exchange (DEX) platforms that were more secure, but also offered other financial services that were more in line with typical banking services, such as locking cryptocurrency to earn interest, to issue loans directly between parties or for other purposes.

There are also separate decentralized platforms that offer similar services.

All of these, with the exception of centralized platforms, are examples of DeFi. Most dApps offer such services as well since they usually require an altcoin or platform-specific token to utilize.