Why ‘DeFi’ Utopia Would Be Finance Without Financiers: QuickTake

Banking has always meant bankers, the intermediaries who are trusted to arrange financial transactions and are responsible for their safe execution. But what if nobody were in the middle, just some computer code? That’s the goal of what’s known as decentralized finance, or DeFi, a movement that’s grown out of a decade of experimentation with cryptocurrencies and the blockchain technology behind them. A DeFi world in which counterparties interact directly via so-called smart contracts would be more efficient and fair, its proponents say. Critics say that DeFi is just the latest installment of the hype, speculation and money-losing possibilities that surround crypto. Now a global anti-money-laundering watchdog has challenged DeFi’s central premise that transactions can take place without any entity being responsible for them.

DeFi revolves around applications known as dapps (for decentralized apps) that perform financial functions on the digital ledger technology called blockchain that was invented for Bitcoin but has since caught on more broadly. Dapps let people lend or borrow cryptocurrencies from others, bet on the rise or fall of a range of digital assets or trade them, and earn interest in a savings-like account. The transactions are governed by rules embedded in the smart contracts. Many of them can also hook onto each other and work together, thereby creating complex financial services.