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Bitcoin is known for its distributed ledger, where decision making is not limited to one but a network of nodes maintained in decentralised form across different countries. Here not one person but a group of people verifies transactions. Having said that, though Bitcoin is the most popular and the oldest cryptocurrency, it is Ethereum which has more features and is far more flexible than Bitcoin.

Bofa Global Research Report states, “The founder of Ethereum, Vitalek Buterin, built the system so that Ethereum virtual machine (EVM) code can encode any computation that can be conceivably carried out. When we last wrote, ICOs were arguably the most notable applications built on Ethereum. More recently, so-called Decentralised Finance has taken over. A number of theoreticians, including Buterin himself, have designed ways of replicating various functions of modern finance in a decentralised way using Ethereum code. The challenge here is not so much programming, as deciding what to program.”

What is Defi?

DeFi stands for decentralised finance. In the traditional system, there are intermediaries for carrying out the transactions. They act as central points for providing services to customers. For example, banks take deposits and insurance companies pool the risks which place a lot of weight around these institutions. DeFi is different.

Bofa report states, “Just as Bitcoin seems to replace a centralised issuing authority who imbues a currency with its own trustworthiness, so DeFi seeks to replace a range of centralised, regulated institutions with decentralised systems, typically based on the Ethereum blockchain. Ethereum is a logical choice for this, as it has been explicitly set up as a “world computer.” Ethereum basically allows you to program anything, but usually, its most talked about feature is “smart contracts”, which can solve a wide range of issues.”

The report states that Smart Contracts are, typically “if…then” statements, a staple of computer programing. They can be used to replicate financial products. As a result, smart contracts are often seen as having applicability to finance. However, they have many other applications, too.

The current DeFi projects mainly break down into the following buckets. First is asset tokenisation, which means establishing tokens that represent assets. The assets can be either generic such as the US dollar or specific such as the house where we live.  The second is decentralised exchanges. These are online exchanges, which help users exchange currencies for other currencies, for example US dollar for Bitcoin. These exchanges connect buyers and sellers directly without any intermediary in between. Last but not the least are lending platforms. They work on smart contracts and connect borrowers and lenders directly without any intermediary such as bank in between.