Understanding The Decentralized Finance

Decentralized finance (DeFi) is the movement that leverages open source software and decentralized networks to transform traditional financial products into trustless and transparent protocols that operate without unnecessary intermediaries. One could envision decentralized finance impacting the financial world the same way that open source software has changed software products.
Decentralizing everything is not a prudent move, and many DeFi applications take this into account by offering hybrid digital asset/traditional financial services. An alternative term that is more encompassing of the ongoing focus on financial products is open finance, where an ecosystem of integrated digital assets, blockchains, and open protocols are ingratiating themselves with conventional financial structures. That may be open banking platforms, cross chains, peer-to-peer landing and etc.

Types of DeFi services

Regularly, any DeFi product or service lays behind one of the following (sometimes occupying more than one) categories:

  • Decentralized Exchange Protocols
  • Stablecoins
  • Lending/Insurance Protocols
  • Asset management tools
  • Derivative Protocols/Prediction Markets
  • Bundling Protocols
  • Tokenization Protocols
  • Fund Protocols
  • KYC/Identity
  • Applications/Tools
  • Payments
  • Analytics

Indeed, there are many more types of participants, services, and products in the DeFi and open finance ecosystem — including custodians, infrastructure platforms, insurance, and payment avenues. It is always prudent to do your own research and understand that DeFi products often involve high-risk assets in uncertain and unprecedented platforms.

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