·2 min read
In the old days, we used banks and other financial institutions to lend and borrow. If we wanted a loan, we’d go to the bank who would assess our suitability and potentially offer a loan. Similarly, if we wanted to lend our assets contacting a bank or broker would be in order.
Decentralized finance (DeFi) improves on this system by offering the same products peer-to-peer. This cuts out intermediary institutions who charge fees, act as gatekeepers, and are liable to corruption.
DeFi achieves this by using smart contracts. When someone lends or borrows using a DeFi protocol, they sign an immutable smart contract that governs the terms of the transaction (including interest paid and earned). If someone wants to alter the contract they first have to fulfill the terms of the contract, close it, then open a new one.
There are currently hundreds of billions of dollars locked in