What is DeFi? A Guide to Decentralized Finance

In the last few years, the buzz around cryptocurrencies like Bitcoin and Ethereum has been making headlines and entering the awareness of everyday people. There is a lot of terminology to cover, and trying to understand it can sometimes seem utterly hopeless unless you have a tech degree. One of the most important terms used on this topic is DeFi. Like most terms in the online tech world, it leaves you asking yourself, what is DeFi? And how is it related to cryptocurrency and alternative finance? 

This guide provides an outline of DeFi, definitions, examples, and future predictions so you can feel confident talking about it at your next dinner party. 

DeFi Defined

The term DeFi refers to the use of cryptocurrency and blockchains to manage financial transactions as an alternative to traditional or legacy banking systems. The term itself is short for decentralized finance, and it functions in a peer-2-peer network, removing gatekeepers and middlemen from banking procedures such as basic financial transactions, loans and mortgages, and other financial products. 

As a result, this can be seen as a democratization of banking, giving power back to everyday people to make their own financial decisions without excessive fees and regulations. 

What is Decentralized Currency? Explaining The Blockchain

Understanding what Blockchain technology is, is central to understanding DeFi and related topics in cryptocurrency. 

A blockchain is a type of database in which new sets of data are stored on a particular block that is attached to other blocks in a chain-like fashion. Once information is stored, it cannot be deleted or reversed, making it especially useful for creating financial ledgers and storing cryptocurrency information. 

What’s the Biggest Blockchain Platform for DeFi?

By knowing the DeFi definition you can begin to understand the utilization of DeFi in a more concrete context. 

Ethereum is the biggest blockchain platform for DeFi and is the second most valuable cryptocurrency, only second to Bitcoin. 

Ethereum is so much more than a currency, however. It set itself apart from cryptocurrency by creating an innovative platform to support and create DeFi applications (dApps). 

Why DeFi Matters

One of the most significant issues with traditional finance is the extensive regulations and red tape surrounding even the most basic transactions. Blockchains are the central component of DeFi, meaning that they create the base for the decentralized ledger. Since it is a new technology that functions on a peer-2-peer network, its characteristics are, so far, unregulated. 

This has the potential to liberate users from the strict regulations that have become standard in legacy financial systems. As cryptocurrency and DeFi gain more interest and value, a system that serves the common person rather than big finance could be attainable. 

What Is DeFi Crypto?

DeFi cryptocurrency coins are simply a subset of DeFi that acts as currency. They typically function on the blockchain model, meaning they’re decentralized and anonymous (to some extent). Their users also enjoy transparent access to the history of transactions carried out on the blockchain.

People often use the term “DeFi crypto” to describe DeFi tokens, too. The difference between crypto coins and tokens is that coins have their own blockchain dedicated solely to that currency. On the other hand, Tokens are created on an already-existing blockchain and are used to operate within the services it provides.

Here’s a DeFi crypto list that includes cryptos and tokens alike:

  • Bitcoin Cash
  • Litecoin
  • yEarn 
  • Ethereum
  • Polkadot
  • Aave
  • Chainlink
  • Cardano
  • Compound
  • Synthetix
  • Stellar
  • Kyber Network
  • Maker
  • Uniswap
  • Binance Coin

There are more instances of DeFi with different uses designed to set them apart in the market and create solutions for DeFi users. They don’t exclusively involve cryptocurrency, but some are created to facilitate compliance, P2P borrowing and lending, analytics, and risk management. 

Is Bitcoin DeFi?

By definition, Bitcoin is considered DeFi. Bitcoin is a cryptocurrency created by a blockchain, which is one of the ways that DeFi is utilized. Every cryptocurrency falls under the term of DeFi, but not all of DeFi involves cryptocurrency. 

DeFi can be used to create many other types of financial services through the use of blockchain tech. For example, Ethereum has recently introduced smart contracts, which are protocols embedded in the blockchain designed to replace traditional financial contracts.

What Is the Best DeFi Crypto?

Which DeFi token you call the best depends on its application and what it has to offer its niche. The following are the best DeFi tokens in terms of market cap (in no particular order):

  • Curve DAO Token
  • UMA Voting Token v1
  • Compound
  • SushiToken
  • Fantom Token
  • Bancor
  • Luna Terra Platform
  • Avalanche
  • ChainLink Token
  • Wrapped BTC
  • Aave Token
  • Uniswap
  • Synthetix Network Token
  • yEarn.finance
  • PancakeSwap Token
  • Maker
  • Dai Stablecoin
  • Mdex
  • THORChain Rune
  • 0x protocol

What Is DeFi Going to Look Like in the Future?

The world of DeFi and cryptocurrency is still unpredictable, although based on its decade of expansion, it does appear that it’s only going to become more accessible and more valuable in the next ten years. 

It does face some obstacles currently, however, before it can reach its full potential, such as: 

  • Vulnerability to DoS attacks
  • Market volatility
  • Lack of liquidity
  • Regulatory quandaries

Considering the amount of interest and innovation in the market, it may be unforeseeable what DeFi is going to do about these hurdles. Still, they will likely overcome them.

There are many types of DeFi that have the potential to completely change the future. For example, DID (Decentralized Identity) is an intriguing application of DeFi. With so much distrust in the ways privacy and identity data is collected and used online, DID provides users with an ID wallet in which they can control and collect identity data about themselves online, choosing when, how, and more importantly, for what price they will distribute their personal data. 

How to Invest in DeFi

Like with any investment, there is significant risk involved in investing in DeFi. Due to the novelty of blockchain, crypto, and DeFi, there is a high prevalence of fraud projects, temporary asset locking, and hacking that occurs in this industry. Remaining alert and as knowledgeable as possible, however, can help mitigate these risks. 

There are two main ways in which investing in DeFi can be incredibly successful: Yield Farming and Asset Trading. 

Yield Farming

Yield farming is the practice of lending or staking crypto assets in liquidity pools to gain interest from lenders or portions of transaction fees.

Depending on the DeFi crypto price, stability, and other factors, you can earn a steady passive income this way. Yield farming comes with its own risks, however, due to a variety of complications which include:

  • Smart contract bugs leading to permanent loss of funds
  • Liquidation of collateral
  • A single block malfunction leading to the entire system collapsing

Asset Trading

Asset trading in DeFi is simpler than yield farming. You can trade DeFi assets on most decentralized exchanges such as:

  • dYdX
  • DEX.ag
  • Balancer
  • Uniswap
  • 0x
  • IDEX
  • SushiSwap
  • Kyber

In order to know what DeFi crypto’s biggest problem is, you just have to look to the volatility of this new market. DeFi projects can crash quickly or even turn out to be scams, but by remaining cautious and informed, many investments can serve profitable results. 


DeFi is a completely new way to think about how the financial world can function. By interrupting and redistributing the power of who decides about transactions, loans, purchases, and more, DeFi is creating a financial market completely separate from legacy banking. 

It goes beyond so much more than just DeFi coins, tokens, or some other new currency. It allows for innovative strategies for dealing with financial interactions that the traditional system just simply cannot compare to. By using blockchain technology and de-regulating the ways we think about money, DeFi could be the way to the financial future. 

People Also Ask

DeFi is a catch-all term for financial applications made on blockchain technology (often the Ethereum platform). The most famous example of DeFi applications are cryptocurrencies, such as Bitcoin.

The field of DeFi includes much more than cryptocurrency. Some of the sectors of finance DeFi is disrupting are:

  • Compliance, 
  • P2P borrowing and lending, 
  • Analytics
  • Risk management.
  • Crowdfunding 
  • Insurance
  • Currency
  • Betting
  • Derivatives
  • Loans
  • Asset management

DeFi is a term that describes a range of financial applications of blockchain technology. This includes cryptocurrency, crowdfunding platforms, smart contracts, and much more.

The main appeal of DeFi is that it offers decentralization. In other words, there is no third-party authority to manage interactions. This reduces red tape, resulting in faster, cheaper transactions. Decentralization also makes it easier for anyone to take care of their financial affairs due to different KYC protocols and greater accessibility.

Ethereum DeFi is a subset of DeFi that operates on the Ethereum blockchain. Ethereum is among the most popular platforms for building DeFi apps (or dApps, as some call them). This is because creating apps on that blockchain is relatively easy.

Here is a list of Ehereum’s DeFi projects that are quite popular at the moment:

  • Bancor
  • DeFi
  • wyre
  • Maker
  • Compound
  • Dharma Protocol
  • 0x
  • DAI

DeFi applications are platforms that allow users to borrow or lend funds from others. They also let you speculate on asset price movements via derivatives, insure against risks, and trade cryptocurrencies.

DeFi uses the blockchain, a decentralized digital ledger that offers a range of benefits, such as greater security, anonymity, and transparency.

Composability, the ability to add apps to the blockchain, is a significant attribute that defines just what DeFi is.