DeFi, also known as decentralized finance, operates by utilizing the blockchain technology and smart contracts to provide financial services without intermediaries such as banks or other financial institutions. This way, working of DeFi creates a decentralized and inclusive financial system that removes gatekeepers, who control and secure transactions, leading to concentration of power and exclusion of those without access to traditional banking.

Smart contracts on Ethereum replace these intermediaries, automatically executing terms of a financial transaction based on predefined conditions. Once live, these contracts ensure the integrity and security of the transaction by being immutable, meaning they cannot be altered.

For instance, one could program a smart contract to distribute a set amount of funds from one account to another on a regular schedule, like every Friday. The contract cannot add unauthorized recipients, and the transfer of funds is contingent on the availability of sufficient funds in the originating account.

In addition to providing a decentralized and inclusive financial system, the working of DeFi also offers several advantages over traditional finance. One of the most significant benefits is the ability to operate 24/7, without the constraints of business hours or national borders. This can enable faster and more efficient transactions, especially for cross-border payments.

Furthermore, DeFi offers greater accessibility, as anyone with an internet connection can participate in the network, regardless of their location or financial status. We cannot underestimate how this technology empowers individuals and communities who have been excluded from traditional financial services.

DeFi smart contracts are open-source and publicly available for inspection and review, which promotes transparency and accountability. This does, however, currently require a certain level of trust in the technical community, particularly those who are able to read and understand the code. As the community and technology progress, they will develop new methods to validate the reliability of smart contracts to mitigate this issue, which will certainly enhance the efficiency of DeFi.

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