- The majority of individuals and companies work with a single, major bank 
- The bank is in charge of rates and fees
- Switching banks is expensive
- The financial system in the United States is heavily concentrated
- DeFi solves this by not having to depend on these financial intermediaries
- Through DeFi, peers interact with peers on a decentralized organization

Centralized Financial System

Centralized financial system inefficiency comes in the form of:
- Long processing times
- Credit card interchange rate
- Slow and costly transfer of funds
- Direct and indirect brokerage fees
- Lack of security
- Inability to conduct microtransactions 

Inefficiency

- Financial institutions lock interconnectivity
- Transferring money traditionally can be complicated and time consuming
- DeFi transactions occur instantaneously and various decentralized exchanges 

Lack of Interoperability

- The current financial system is not transparent
- Bank customers have very little information on the financial health of their bank and must place their faith in limited government protections
- In the digital era, financial infrastructure has failed to adapt
- DeFi solves this by offering new opportunities while also promoting trust and security amongst all users without top-down control

Opacity 

- Many people are unbanked (1.7 billion), which makes obtaining loans and operating in the world of internet commerce very difficult

- Banks take priority to higher paid loans while suggesting outrageously high borrowing rates with credit card loans (^20%)

- DeFi allows for collectivization of financial products amongst the entire community

- Accessibility for all people is crucial in preventing widening wealth gaps

Limited Access

- Centralized financial system

- Inefficiency

- Lack of interoperability

- Opacity 

- Limited access


University of Michigan - Ann Arbor

Butler University

DeFi or Decentralized Finance is financial infrastructure built on blockchain. It is based on open protocols and decentralized applications. Smart contracts serve as the backbone of DeFi. Overall, it is much more open and transparent than traditional financial services. DeFi offers financial instruments without relying on central financial institutions such as banks and brokerages.

DeFi

Harvey, Campbell R., et al. “Defi and the Future of Finance.” SSRN, 15 Dec. 2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3711777. 

DeFi and the Future of Finance 

- Settlement layer
- Asset layer
- Protocol layer
- Application layer
- Aggregation layer

5 Layers of DeFi architecture (The DeFi Stack)

- Asset tokenization
- Decentralized exchange protocols
- Decentralized lending platforms
- Decentralized derivatives
- On-chain asset management 

Key DeFi Terms

The principal risks DeFi faces today are smart contract, governance, oracle, scaling, exchange, custodial, DEX, and regulatory risks. DeFi allows developers to create new types of financial products and services, expanding the possibilities of financial technology. While DeFi can eliminate counterparty risk, cutting out middlemen and allowing financial assets to be exchanged in a trustless way, as with any innovative technology, the innovations introduce a new set of risks.

Learn Before

Related

Learn After