Decentralized Finance

This technical note introduces students to decentralized finance (DeFi)—blockchain-based protocols that offer financial services without centralized intermediaries. Advocates herald DeFi as the future of finance. Critics counter that it has inherent flaws that will limit its widespread adoption. It explores how blockchains, smart contracts, and decentralized autonomous organizations (DAOs) can be used to facilitate disintermediation, focusing on two key applications: stablecoins and decentralized exchanges. Finally, the note compares the advantages and disadvantages of DeFi relative to traditional financial services, challenging students to consider its disruptive potential. The note is designed for use in the Fintech course at the University of Virginia Darden School of Business and is intended to introduce applications of blockchain technology that extend beyond that of a digital ledger. While the note provides a review of blockchains, it is recommended that students have a preliminary understanding of this topic so the discussion can focus on DeFi applications. The note is accessible to nontechnical students at the undergraduate, graduate, and professional levels.