How DeFi is changing the Future of Finance.

Defi is "killing banks" and reshaping the whole financial industry as we know it.

Humans have always searched for ways to exchange values. As humans evolved we bartered goods and services from shells/ cowries to stamped coins to paper money to digital, we are on a border of evolution. We invented currencies to make it easier for transactions to take place.

Fortunately, currencies helped usher in innovations and created better levels of the economy. However, with currencies came central authorities that underpin our economies and gave them more power as we began to trust them and use the currency. However, trust has been broken from time to time, which makes people question the centralized authorities' ability to maximize said money.

What’s Defi?
DeFi refers to decentralized finance which is financial services that run on smart contracts. Instead, it requires no middlemen such as banks or exchanges for easy lending, borrowing, or trading of financial tools.

Defi is referred to as a financial application built on Blockchain technology.

A link to my article on understanding blockchain technology medium article.

DeFi was developed as a more accessible and transparent financial system that puts control back in the hands of regular people and reduces the need to trust and rely on banks or financial institutions.

The Evolution of finance.
Finance went from TradFi to CeFi and now we are in the initial stage of Defi.

TradFi which is traditional finance relies on middlemen and physical locations. You rely on banks to send money, earn interest and get a loan. We all know banks charge borrowers higher rates for loans to make money.

CeFi which is centralized finance relies on middlemen on online platforms. You rely on their platforms to send money and invest your money on those platforms and you can be banned from such platforms if you violate their rules.

DeFi relies on code, you can send money, earn interest, and get a loan from users directly through smart contracts that enforce the rules.

Smart contracts are automated enforceable agreements that do not need middlemen to execute and can be accessed by anyone with an internet connection.

Most DeFi applications today are built using the Ethereum network which is a layer 1 network, but other public networks are emerging that deliver superior speed, scalability, security, and lower cost.

Properties of DeFi
Trust- In TradFi and CeFi middlemen like banks and online platforms hold your money while in DeFi, you hold your money and smart contracts handle it.

Transparency- TradFi and CeFi data aren't accessible but many DeFi data and protocols are open sources

Permissionless - TradFi and CeFi can't be accessed without the central authorities, while in DeFi anyone can access it.

Identity and access - To make transactions in banks and online platforms you must have a bank account/ online account with your identity and credentials. Banks and most online platforms aren't open 24/7. But DeFi protocols don't require your identity as long as you have a crypto wallet and DeFi protocols work 24/7.

Returns- Banks and online platforms take a large cut of your returns while DeFi returns are often higher due to more risk.

Composability- TradFi and CeFi aren't open and therefore better features can't be built on top but DeFi protocol can be built on top just Like Ethereum which is a layer 1 protocol and Polygon which is a Layer 2 protocol for better and easier scalability.

Risk- Banks and Online platforms are federally insured and heavily regulated, while DeFi protocols are usually not insured or regulated for now. So DeFi involves more risks like scam projects, high rise in token prices, and smart contract bugs.

Immutability - TradFi and CeFi aren't built on systems and codes that can easily be changed while DeFi is built on Blockchain.

What can You do with DeFi?

Imagine being able to earn, borrow, swap, and everything you can think of with cryptocurrency.

Awesome isn't it? 😎

You can:

Send money- You can send cryptocurrency e.g. Bitcoin, or Ethereum to anyone else in the world if you have their public wallet address. Eg:Metamask wallet, Rainbow wallet, ENS domains.

Stake cryptocurrencies -You can gain yield by staking (e.g., lock-up) your cryptocurrency to help validate blockchain transactions. Eg: Ethereum 2.0, Polkadot, Solana, Polygon.

Hold stablecoins- you can hold stablecoins to earn passive yield without dealing with volatile crypto prices. Stablecoins are coins pegged to a "stable" asset like the US dollar. Eg: USDC, Tether, Binance USD, Dai, UST.

Earn yield - by putting your cryptocurrency in the liquidity pool which is then lent to borrowers and you can earn interest for such lending. Eg: Yearn crowdfunds projects, Compound, Aave.

Swap tokens- by putting collateral in one currency and swapping it for another. Eg: Uniswap, Pancakeswap.

Funds- you can raise funds for a project by issuing tokens or NFTs that people can buy. Buyers could earn governance rights and other benefits Eg: Gitcoin Grants, Mirror, and Juicebox.

DeFi index funds - buy DeFi index funds that automatically invest in the top DeFi tokens.

Apps: Index Coop.

Emerging Use cases- Defi is at the initial stage and different uses are coming into reality like insurance, identity, credit scoring e.t.c.

The world of DeFi is so big and limitless, look at your defying central authorities and being a DeFi expert.

Go get it!