Beyond Bitcoin: What Is Decentralized Finance?

As Bitcoin prices continue to shatter previous records, some on the cutting edge of finance are looking to the next logical step: decentralized finance.

Decentralized finance promises to do for all financial interactions what cryptocurrency does for money. Using peer-to-peer level programs, everything from mortgages to investing can be done without the need for a bank or central authority.

For example, say someone wants to take out a loan to buy a house. They would put out the call, perhaps on an online marketplace, and someone looking to loan money could take them up.

The pair would negotiate the terms of a contract, which would then be translated into an autonomous program. If the home-buyer failed to fulfill the terms, by say not making their monthly payments, the title for the home could be automatically transferred to the lender without a lengthy foreclosure process.

The idea is still in its early stages, but could eventually lead to unprecedented transparency and access. While people in countries with easy access to large financial institutions might not see the point, decentralized finance is especially promising for the almost two billion adults that don’t have bank accounts but do have access to the internet.

The system is based on the same blockchain technology that powers Bitcoin. While the Etherium network is most popular right now, competitors are popping up that offer smaller transaction fees.

The integration of contracts and programs also allows innovators to develop increasingly complex interactions. Everything from short-term loans to exchanging assets to investing can be executed without an intermediary.