DeFi-ned

The Internet has dramatically changed everything in our world, especially businesses and their work environment. It’s no longer a manager or an entrepreneur acting as the one who takes all the decisions, now companies are adopting a more decentralised organisational structure in which everyone is involved in making decisions. We can see how tools like Slack, Microsoft Teams, Zoom, and even WhatsApp contribute to our day-to-day work discussions and open a space for everyone to share thoughts and empower a decision.

If we bird-eye-view this, we will find that all those tools/apps managed to do a few common things like providing connectivity, simplicity, and removing INTERMEDIARIES (which takes us to today’s topic).

Talking about intermediaries or middlemen in our day-to-day life; think of the most famous and common middleman you probably meet daily. Thought of one?

Thought of how you send or receive money? How do you deal with stock exchange? How do you apply for a loan to buy your dream car?

Ok, let me tell you that you can’t do any of those without an intermediary and this is how the traditional financial system works. Everything is centralised and in order for you to feel okay with doing any transaction, all parties involved need to trust that this middleman will act fairly and honestly.

So, what if the whole financial system is no longer centralised?

I will be a middleman here for your Google search on Decentralised Finance and break it up for you into definition, history, and services offered.

Let’s start 🎬

What is DeFi?

/ˈdiːˌfaɪ /

Pronounced as (dee-fyee), DeFi stands for decentralised finance, a term that has emerged describing an ecosystem of powerful financial tools that (definitely) run on the internet and most importantly free from the control of intermediaries.

History of DeFi

When the first whitepaper on Bitcoin was published in October 2008, finally we were able to make peer-to-peer transactions without intermediaries. The same year the world was suffering from a global financial crisis, Bitcoin was seen as a possible opportunity for a new independent financial ecosystem.

2013 marked the launch of Ethereum improving the range of features that Bitcoin offers. One of the main features was smart contracts which are self-executing contracts with the terms of the agreement between buyer and seller written into lines of code.

MakerDao –some consider it the pioneer of DeFi- was then founded in 2015 and generated ‘DAI’ stablecoin that follows the price of USD and can be used for services like peer-to-peer loans. The difference between a stablecoin and something like Bitcoin is that the stablecoin has a stable value (USD) unlike Bitcoin that could fluctuate with the markets.

Subsequent projects were built later seeking to leverage blockchain to deliver financial services without the need for centralised intermediaries.

Still a bit tough, isn’t it?

Let’s discover some live use cases being used in DeFi world right now!

Some of DeFi's applications and use cases:

Smart contracts

A piece of code that is stored and executed automatically on the blockchain to make it trustless and secure. Smart contracts allow anonymous parties to make transactions without the need for a central authority or any middleman.

Traditional financial transactions

Almost everything and anything from payments, and insurance to lending and borrowing are active and happening in DeFi.

Decentralised exchanges

Or crypto exchanges like Coinbase or Gemini, which facilitate peer-to-peer financial transactions and let users retain control over their money. DEXs also provide token projects with access to liquidity without any fees.

E-wallets

DeFi wallets facilitate managing digital assets and interact with DeFi applications such as DEXs or lending and borrowing. They can be used to access everything from cryptocurrency to blockchain-based games. Their most popular forms are browser extension, hardware wallets, mobile app and web wallets.

Stablecoin

As mentioned earlier, stablecoins attempt to stabilise their values by tying them to non-cryptocurrencies like USD and DAI. They were developed to reduce the volatile prices of cryptocurrencies and make blockchains a viable payment solution.

While cryptocurrencies are notoriously volatile, stablecoins attempt to stabilize their values by tying them to non-cryptocurrencies, like the U.S. dollar.

A stablecoin is any cryptocurrency that is pegged to a stable asset or basket of assets, such as fiat, gold, or other cryptocurrencies. They were developed to reduce the volatile prices of cryptocurrency and present blockchain as a practical payment solution

NFTs

Using NFTs as collateral to borrow money, meaning that the user can supply an NFT representing a piece of art or even a tokenised real estate as collateral to borrow money against it.

Flash loans

A feature that allows users to borrow any available amount of assets from a smart contract pool with no collateral. It’s a bit different from decentralised lending as it allows users to borrow without providing any personal information. It’s still not accessible to everyone but in the near future, it will be.

To sum up

While many of us are still thinking that DeFi is a theory or a futuristic thing, DeFi keeps evolving with astonishing speed providing a space for investors, developers, and Fintech companies to create a new financial ecosystem.