How Does Decentralized Finance Work?December 3, 2021
DeFi uses cryptocurrencies and smart contracts to provide services that don’t need intermediaries. In today’s financial world, financial institutions act as guarantors of transactions. This gives these institutions immense power because your money flows through them. Plus billions of people around the world can’t even access a bank account.
In DeFi, a smart contract replaces the financial institution in the transaction. A smart contract is a type of Ethereum account that can hold funds and can send/refund them based on certain conditions. No one can alter that smart contract when it’s live – it will always run as programmed.
A contract that’s designed to hand out an allowance or pocket money could be programmed to send money from Account A to Account B every Friday. And it will only ever do that as long as Account A has the required funds. No one can change the contract and add Account C as a recipient to steal funds.
Contracts are also public for anyone to inspect and audit. This means bad contracts will often come under community scrutiny pretty quickly.
This does mean there’s currently a need to trust the more technical members of the Ethereum community who can read code. The open-source-based community helps keep developers in check, but this need will diminish over time as smart contracts become easier to read and other ways to prove the trustworthiness of code are developed.
Source: Ethereum Website
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