Dogecoin and NFTs have captured the public’s imagination, but money is also flooding into another hot, and risky, corner of the cryptocurrency market: DeFi.
Short for decentralized finance, DeFi is an umbrella term for financial services offered on public blockchains. Like traditional banks, DeFi applications allow users to borrow, lend, earn interest, and trade assets and derivatives, among other things. The collection of services is often used by people seeking to borrow against their crypto holdings to place even larger bets.
There are two key differences from mainstream banks: All services are for digital currencies instead of government-issued ones such as the dollar and the euro, and there is no intermediary or centralized system through which transactions are processed.
Users typically access DeFi platforms through software known as dapps, or decentralized apps, most of which run on the Ethereum network. They connect their digital wallet to the app and select a service from a drop-down menu. Functions handled at a traditional bank by a loan officer or teller are automated.
“It’s essentially banking for the blockchain space,” said Antoni Trenchev, co-founder and managing partner of Nexo Capital Inc., one of the largest firms in the DeFi industry.