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Explain Like I'm 5: Decentralized Finance
None of this is financial advice, just an educational tool. All protocols mentioned are very new. They should at best be considered Beta-release systems.
Do your own research (DYOR), don't risk anything you can't live without, and don't trust anyone. Never give out your private key, seed phrase, mnemonic, or passwords.
Since crypto is ever-evolving, this will never be able to cover absolutely everything. Notice something is missing? You can contribute on GitHub!
Now that we've gotten that out of the way, welcome!
Decentralized Finance (DeFi) is a growing group of financial tools built on Ethereum. These tools are open for anyone to use; all you need is an Ethereum address and some Ether (ETH). These tools span a range of uses that let users trade crypto-tokens, take out a loan, cast a vote, and even sell art. Since these tools follow a set of standards, users can combine operations across different protocols. For example, you can build a chain of transactions where you borrow money, make a profitable trade, and repay the loan -- all instantaneously.
DeFi enables non-custodial financial tools to the world. This means that you are in control of your funds, not a company, not another person -- you. Non-custodial lending goes through publicly posted software contracts, not a bank. Decentralized trades happen with non-custodial exchanges, not trusted middle-men. This isn't to say that every contract is well written -- bugs exist, scammers deceive, and bad contracts are out there. Do your own research (DYOR), use audited contracts, and only use money you are willing to lose.
DeFi is the bleeding edge of financial development. It's very exciting, but use caution.
DeFi runs on Ethereum, which means that any computer that is part of the Ethereum Network is supporting DeFi. If you've ever heard of someone "mining" cryptocurrency, those are the computers we're talking about. Anyone is free to mine Ethereum on their computer, so the power of the network is in the hands of the public, not any one company or government. This makes it virtually impossible to turn off.
DeFi protocols are built by individuals, teams, and companies, but many of them have plan to gradually give control over to the communities that have developed around them.
Much like how Bitcoin was developed out of disgust of government money policies, DeFi has developed out of disgust of Centralized Finance, also called Traditional Finance (CeFi & TradFi).
DeFi promotes the concept of going "bankless" and taking control of your own assets. It lets you remove the middle-men of banks, who make money lending out your money. DeFi markets don't require anyone's permission and never close, so you can trade whatever you want, whenever you want.
DeFi can quickly get technical, but that doesn't mean you need to have PhDs in Mathematics and Distributed Computing to see how powerful it all is. Learning about these tools can open doors to all sorts of new users with different backgrounds, lifestyles, and experiences that can contribute in ways that others didn't see before. If you find this guide useful please share it!
This site and the information on it are and always will be free! If you really really like this guide want to chip in with a tip, here's the tip jar address:
ETH and ERC-20 tokens only, any other assets sent to this address will be lost :(