Decentralized Finance is a phenomenon that is sweeping the globe. While DeFi mostly exists in the corners of the globe where modest crypto adoption has taken place, DeFi is ripe for adoption in developing nations. Simply put, DeFi is a suite of technologies that allow people to manage their finances on a peer to peer basis. Right now, most people get their financial services from centralized entities like banks, and insurance brokers. DeFi is creating the ability for people to choose where they keep their money, who they get a loan from. Most importantly, it lets people choose the terms of the agreements, instead of being forced to conform to the current rigid banking structures. Bitcoin birthed the decentralized finance movement. For the first time in recent history, ordinary citizens gained access to an opt-in financial system completely free from government or institutional control.
By: Keegan Francis | May 13, 2020 | Modified May 21, 2020
There are many parts that make up the world of decentralized finance. Storage, lending, loaning, insurance, crowdfunding and simple transfers are all aspects of innovation that are taking place in DeFi. Decentralized technology is hard, and new, making widespread adoption a challenge. As developers iterate and advance the technology, the hypothetical benefits are already being realized by early adopters, who are eager to share the benefits with the disenfranchised.
Storing and transferring your money in a decentralized way has been an aspect of DeFi for so long that it often is left out of what makes defi what it is. The truth is, it is the cornerstone of which DeFi is built on top of. Without the ability to own your money directly, and control when and how you transfer it, the rest of DeFi would fall apart. Nothing in DeFi takes place without your consent, and this is by design.
The total value of all cryptocurrencies rose above $100 billion in 2017, and never came back down. People naturally began developing more ways to grow, and use this accumulation of wealth. Lending, and loaning your money are interrelated to one another. Cryptocurrency lending platforms such as Nexo and BlockFi allow anyone to deposit cryptocurrency assets and lend them to others.
On the other side, if you need access to additional capital, you can use your cryptocurrency as capital, and collateralize a loan. The interest rates on the loans range from 4% to 12% depending on the structure of the loan. With a regular bank, your money is already being loaned to other people. Banks give interest rates from 0% to 3% on traditional savings accounts to compensate you for using your money. DeFi allows you to earn more of what could be yours in the first place. The one caveat is that it arguably carries more inherent risk than a traditional bank.
A massive aspect of DeFi, is the ability to rally together millions of dollars from the crowd in minutes, hours, days, weeks, and even years. This was thoroughly demonstrated in 2017, during the great crypto boom. During this time, Ethereum was being used as a crowdfunding platform through the use of smart contracts. Ethereum made it simple for people to create their own token, or coin, and sell it to the public.
The idea is that the tokens or coins represented some sort of stake in whatever project or technology would be manifested from the efforts of developers. This system was abused quite heavily, as there was no legally binding obligation for the facilitators of the sale of these tokens to make good on the promises they made to investors. DeFi is still young, and so the seedy underbelly of the internet and financial world can be expected to have their hand in the pot while the white knights in the space iron out the kinks.
One of the largest innovations that make complex DeFi applications possible, is smart contracts. Smart contracts are self executing code, that automate the creation, transfer, and trading of value.
Smart contracts make it possible to financially interact with other people in the world, and trust that terms of the contract will be executed according to the agreement. This innovation makes conducting trade or finance much simpler when trust is in short supply. Any parties involved in the transaction no longer need to trust one another, they may now place trust in the computer that handles the interaction. This role was previously held by bankers and lawyers.
One of the most exciting developments to emerge from DeFi is the adoption of cryptocurrencies and other decentralized forms of money by the underdeveloped world. The term skip technology was realized when the underdeveloped world skipped land phone lines, and went straight to cell towers and cell phones. While the developed nations needed to go incrementally from one technology to another, this pace was too quick for countries without the infrastructure to deploy complex communication networks. As costs sunk, and the technology became more widespread, setting up cell towers presented itself as a more readily available gain over the previous land-based communication lines.
Decentralized finance is primed to follow a similar route of cell phones. The number of people gaining access to the internet is growing rapidly on a day to day basis. There is still 40% of the world without access to the internet today. This number is shrinking due to technologies like SpaceX’s StarkLink.
Anyone with a basic internet connection can suddenly avoid the problems with dealing with local financial infrastructure. They suddenly gain the ability to participate in a global economy. The aspects of DeFi that are most appealing to people in developing nations are humanistic in nature. At the end of the day, ordinary people want to provide food for their family, and save for a better future. Whether that means immigrating to another country, and moving their wealth without losing 10% to fees. Or having consistent and reliable access to a stable money for groceries. DeFi is well on its way to providing these basic functions.
Decentralized Finance is an umbrella term for peer-to-peer financial interactions. It was a natural progression for us to build international banks and corporations. This is one of the quickest ways that human civilization could build a global civilization.
Until now, it hasn’t been possible to trade and transfer value on a global level without the help of international banks. The invention of the internet has brought us all much closer together. We are now able to trade, transfer and share information on a peer to peer basis. Blogging sites, and video hosting platforms has made the transition away from centralized information sources very smooth. We are seeing the same thing take place with the invention of cryptocurrency. Decentralized finance is the term given to the phenomenon of conducting monetary transactions on a peer to peer basis. What the internet did to information, blockchain is doing to money.