What is DeFi? Let’s break it down
DeFi 101: Decentralized money
Disclaimer: none of this is financial advice, just educational content with educational purposes.
If you don’t know already what Blockchain is, please start here: Blockchain: Types, Pros, and cons and All you have to know about Blockchain
Let’s get started.
What is DeFi?
The easiest way to explain it is that: DeFi is a term for decentralized financial products and services accessible to anyone on the Blockchain. Instead of going to a Bank, we can now have access to financial services provided by people around the world. DeFi removes the control banks and institutions have on money, financial products, and financial services.
But why do we need DeFi?
To provide better access to financial services to more people
Let’s see the following e.g. Imagine you are traveling through Brazil and suddenly you need $10k. You call your bank in Europe and ask for $10k. “It’s an emergency, Sir, I really need it now.”The Bank looks into your account and replies: “Sorry, we can’t lend you more than $5k at the moment and it will take 2 working days to have the money in your account.” “Damn but….”
The problem
“It’s Friday and I really need the money now to get back home on Monday. If at least someone in Brazil could lend me the money. We make a contract agreeing on the conditions” you said
But, wait a sec… Read about Smart Contracts: Smart Contracts on Blockchain and How it works?
Understanding the problem
“Which mechanisms are there to solve my problem other than banks? Can a friend of mine lend me the money? And how can I have the money faster than the 2 working days? I’ve heard this Ethereum thing could help”
You can read about Ethereum here: What is Ethereum and How it works
The solution
And here comes DeFi. Just by connecting apps on the Ethereum blockchain, you have access to people around the globe willing to lend you money.
And the best part? It works 365 days a year and doesn’t need 2 working days to get the money.
You agree on the conditions with the borrower using a Smart Contract, have the amount wired to you in ETH, and puff, done. After you’ve got the amount you’ve asked in ETH, you exchange it for $$ and withdraw it from your account.
You might ask “But is DeFi just about lending money?” No
Other Use of DeFi
“So what can you do with DeFi other than lending money?”
- Buy Insurance
- Fund your ideas
- Start savings accounts
- Send money around the globe
- Build a portfolio of crypto assets
Why should I care about DeFi?”
You might also ask “But Bernie, how does this affect me?”
Ok, let me give you a proper story about someone whose life got messed up due to having no access to proper financial services.
Read: Marcos Villa story, a 40-year-old Mexican US immigrant
What It’s Like to Be Unbanked in America Today
Mind you, DeFi offers very interesting solutions when compared with Traditional Finance.
What DeFi (Decentralized Finance) aims to achieve.
Two of DeFi’s goals are to reduce transaction times and increase access to financial services by eliminating the middle man – the Banks – who profit from lending you money and managing your money.
DeFi Currency
DeFi uses cryptocurrency for transactions. While the technology is still developing, there are conceptual ideas for how existing cryptocurrencies may be implemented on DeFi platforms, including stable coins—a cryptocurrency backed by an entity or pegged to a fiat currency—as well as tokenized securities, derivatives, and prediction markets.
Benefits of DeFi
- It eliminates the fees that banks and other financial companies charge for using their services.
- You hold your money in a secure digital wallet instead of keeping it in a bank.
- Anyone with an internet connection can use it without needing approval.
- You can transfer funds in seconds and minutes.
Conclusion
As mentioned before, DeFi is decentralized finance that lives in the Blockchain through the form of Smart Contracts. It gives access to peer-to-peer financial services 365 days a year, 24h a day. The Big Vision behind DeFi is to make financial services more accessible to the ~1.7 billion people around the globe with barely any access to Banks or financial services.
Sources and further readings: