What is DeFi? What is a decentralized exchange (DEX)?

Introducing the basics of decentralized finance (DeFi) and three projects perfect for beginners.

Cryptocurrency is more than just a new version of digital cash or payments. It is a new financial ecosystem built on the blockchain’s globally accessible, censorship-resistant, unstoppable, and autonomous platform.

Here, we cover the basics of decentralized finance (DeFi) and how users can fully realize the potential of their cryptocurrencies.

What is DeFi?

Short for “decentralized finance,” DeFi is software built on top of blockchains that can create services similar to standard centralized financial services, but with the benefits of decentralization. This means that users interact with smart contracts and code instead of with a central institution like a bank.

For example, let’s say one person is looking to lend out excess funds and another person is looking to borrow money for their business. Traditionally, they would have to go through a centralized financial institution like a bank. In addition to this, the bank has the power to decide whether an individual qualifies for these services.

However, DeFi eliminates this entire discussion, as lenders and borrowers only need to interact with smart contracts, where the terms and conditions of the transaction are already pre-defined. This turns a rather demanding procedure into a decentralized one that is fair to all users.

What is a Decentralized Exchange (DEX)?

One of the most common dapps is a decentralized exchange (DEX), which is an essential component of any DeFi ecosystem. It facilitates the core functionality in DeFi: the ability to exchange tokens. DEXs offer users a more decentralized service than standard centralized exchanges (CEXs) because they are automated market makers (AMMs) that use liquidity pools for trading.

In a traditional order book, a CEX connects buyers and sellers to trade, and users can only access the tokens they offer. Whereas in a decentralized exchange, users can use almost any token because any user can provide liquidity.

To access dozens of DEXs in one app, download the Crypto.comDeFi wallet.

A final word on DeFi: In this short introduction to DeFi, dapps, and DEXs, we introduced a new financial system that allows people to trade peer-to-peer without the involvement of middlemen. DeFi is truly revolutionary and offers tremendous potential, especially for the approximately one-third of the world’s population that remains unbanked and excluded from the traditional financial (TradFi) system.