What is DeFi?
You want your money when you need it. But banking is usually not that supportive or user friendly. The thing about it is that banks make the rules about if and how you can access your money. It’s one central source that regulates transactions.
Now imagine a system where instead of a single bank, there is a network of computers that have shared data across the entire network, and transactions happen through an integrated system. Such a network is not controled by a bank. Instead, it’s spread out over a peer-to-peer network, so it can’t be controled by any one source. That is Decentralized Finance (or DeFi).
Cryptocurrency is at the heart of DeFi with its revolutionary blockchain technology. The blockchain replaces singly-owned record keeping with a chain of information “blocks”, each tied to the previous one. This results in the network itself being the information and its users are tapped into and participate in it via smart contracts.
Smart contracts are essentially the code that propels the blockchain forward. They facilitate communication on the blockchain to issue transactions according to a written protocol executed by the blockchain network once certain conditions are met as per the contract.
The problem that smart contracts remedy is that of clunky, outdated feet dragging, and needless intermediaries when it comes to accessing one’s money. Think about what you have to do when dealing with a bank—all the hoops you have to jump through; endless personal information. It almost feels like you can’t access money unless the bank knows the name of the pet fish you had in eighth grade. The bank is a money gatekeeper. They essentially own access to funds. A smart contract and the blockchain network it runs on, eliminates bank fees, long lines, and invasive information gathering, and simply connects fund bearer with fund recipient.
Thanks to the freedom from restrictive institutions, the possibilities for DeFi extend beyond ordinary cryptocurrency transactions:
“Now, users can find financial services on the distributed ledger for loans, insurance, margin trading, exchanges, and yield farming (yielding rewards from staking digital assets on a network to help facilitate network liquidity).” (Entrepreneur.com)
DeFi is a game changer not only for the cryptocurency sector, but also for peer-to-peer (P2P) lending, such as P2P escrow, and collateralized loans, where an open-network, third party facilitates the meeting between borrower and lender. These transactions take place via P2P lending platforms who run blockchain technology. Should anything happen to the platform, the borrower and lender are protected by the network, because there is not one sole owner behind the transaction.
P2P technology has also created the DApp space (Decentralized Apps), some notable examples being BitTorrent and Chainlink. As is the common DeFi characteristic, DApps operate via a network rather than being owned by a single entity. This spells good news for the plethora of wallet apps, which put the user in control of their money:
“Thanks to the non-custodial nature of DeFi wallets, users can safely store their own funds without having to rely on third-party institutions to hold their assets.”
Swapping between crypto and fiat can be as simple as inputing credit card information, and you’re wallet is ready to go.
Despite the modernization in the tech space, DeFi still has a little ways to go before it’s implemented at full force, as consumers are not completely onboard with the new technology, though the sentiment is changing. The events of the past year going into 2021 that led to the world-wide economic crisis has brought more people and businesses onboard. The value of the technology that makes cryptocurrency tick presents itself as a viable alternative to the old system. It is “the world’s answer to the 2008 financial crisis,” writes Ariel Shapira of Entrepreneur.com.
One thing is clear, and that is we are on the brink of a complete financial revolution, with blockchain and DeFi leading the way.
Contributed by Garrett S.