DeFi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.
Most applications that call themselves “DeFi” are built on top of Ethereum, the world’s second-largest cryptocurrency platform, which sets itself apart from the Bitcoin platform in that it’s easier to use to build other types of decentralized applications beyond simple transactions. These more complex financial use cases were even highlighted by Ethereum creator Vitalik Buterin back in 2013 in the original Ethereum white paper.
One example of a DeFi protocol is Uniswap, which is a decentralized exchange or dex that runs on the Ethereum blockchain and allows for the trading of hundreds of different digital tokens that are issued on the Ethereum blockchain. Rather than relying on centralized market makers to fill orders, Uniswap’s algorithm incentivizes users to form liquidity pools for the tokens by issuing trade fees to those providing liquidity. A development team writes software for deployment on Uniswap, but the platform is ultimately governed by its users. Because no centralized party runs Uniswap, there is no one to check the identities of the people using the platform. It is not clear what position regulators will take on the legality of a platform like Uniswap.