Decentralized Finance and How DeFi Works

Decentralized finance sounds frightening so let's just call it DeFi from now on. But to understand the basics of how DeFi works, we also need a basic understanding of blockchain, because it is this technology that is in the process of transforming the global financial sector and that is going to affect you, us and everyone in between.

DeFi Explained

In How Blockchain Works and DeFi, episode 4 of Topp Jirayut’s Cryptocurrency Revolution web series on CI Talks, you will learn from Topp why an open financial system is the future.

Up until now, financial services for the masses have been decided by a relatively small number of executives in closed door meetings. What was decided during those meetings was what ultimately became available for us to use. This is a closed financial system which is also dependent on intermediaries (banks, credit card companies, etc).

Now think of the App Store or Google Play Store. Anyone can create apps for everyone to download and use, right? This is effectively what an open financial system, or decentralized finance, will create, except on a much bigger scale and with no intermediaries involved.

Blockchain Layers

Let’s take a quick look at the components or layers of the blockchain to get a better understanding. In his video, Topp defines 4 layers:

1. State of Account
2. Programmable Money
3. Protocol Layer
4. Application Layer

Reshaping the Future of Finance

The Application Layer (layer 4) is the user interface and how we access services that are being offered via blockchain technology. Layer 3, the Protocol Layer, is home to computer programmes that are written on what is called the “Smart Contract”. This is where the fun starts as it is here, using layer 3, that anyone can programme and release blockchain services and the reason why DeFi will reshape the future of finance.