What is DeFi?
Using blockchain, the technology behind the digital currency bitcoin, DeFi came up with a way to make it easier for people to keep a record of their transactions. As such, it's not controlled by a single, central source. Centralized systems and human gatekeepers could slow down and complicate transactions, while giving users less control over their money. That's why it's important to note that DeFi is unique because it advances the use of blockchain from simple value transfer to more complex financial use cases.
A popular type of DeFi is called a "lending market," which connects people who want to borrow money with people who want to lend money in the form of cryptocurrency. The Compound platform is one of the most well-known components. It lets users borrow cryptocurrencies or lend their own funds. If you loan out some of your cash, you can make money by getting paid interest. So if there's a lot of demand to borrow a cryptocurrency, the interest rates will go up, which in return determines the interest rates of Compound.
DeFi loans are collateral-based, which means that in order to get a loan, a user has to put up something as collateral, like ether, the token that runs Ethereum. That means users don't have to give out their name or credit score to get a loan, which is how normal loans work.
How DeFi works