What is DeFi?

The UK’s Information Commissioner’s Office has written a report which, amongst other things, considers the privacy implications of Decentralised Finance (DeFi) ¹. The report explains that data stored as part of decentralised finance is unlikely to be anonymous and brings with it a wide range of privacy requirements. That aside, the DeFi section in the report starts with this excellent description of what DeFi is.

Traditional financial systems. Traditional centralised finance involves third parties, often banks, moving money between consumers and merchants. The third parties verify and approve the transaction, providing a layer of trust in the system and, usually, earning a fee in return.

DeFi system. DeFi uses software in the form of distributed ledger technology (DLT) to establish trust. This enables peer- to-peer transactions without a financial institution intermediary. Blockchain, the most widely-known application of DLTs, uses multiple interconnected database copies to process transactions. These databases, which might be in a number of different physical locations, are linked across a network, appearing to be a single database.