Learning Objectives:

  • Define decentralised finance and explain how it differs from traditional finance.

  • Describe key DeFi applications: decentralised exchanges, lending, and borrowing.

  • Explain the potential benefits and challenges of DeFi.

5.1 Defining Decentralised Finance (DeFi)

DeFi is a new way of transacting in financial markets, powered by blockchain technology and requiring no intermediaries or central authority . It leverages smart contracts to recreate traditional financial services—such as lending, borrowing, trading, and saving—in a decentralised, permissionless manner. UCL’s module provides an in-depth exploration of De-Fi and blockchain technology, focusing on their revolutionary impacts on finance and payment systems .

5.2 Key DeFi Applications

Singapore Management University’s DeFi module covers the exploration of “decentralised exchanges, lending platforms, and yield farming strategies” . Key DeFi applications include:

  • Decentralised Exchanges (DEXs): Platforms for trading crypto assets without a central intermediary.

  • Lending and Borrowing Protocols: Platforms enabling users to lend their assets to earn interest or borrow assets by providing collateral.

  • Yield Farming and Liquidity Provision: Strategies for earning rewards by providing liquidity to DeFi protocols.

5.3 DeFi vs. Traditional Finance

The HKSI course requires an understanding of “how decentralized finance, or DeFi, differs from the traditional financial system” . Key differences include:

  • Intermediation: DeFi eliminates intermediaries, reducing costs and increasing efficiency.

  • Access: DeFi is permissionless, allowing anyone with an internet connection to participate.

  • Transparency: DeFi transactions are recorded on public blockchains, providing transparency.

  • Innovation: DeFi enables rapid innovation and experimentation.

5.4 Potential Benefits and Challenges

Potential benefits of DeFi include increased financial inclusion, greater efficiency, transparency, and innovation . Challenges include smart contract vulnerabilities, regulatory uncertainty, scalability issues, and the risk of hacks and exploits .

 

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