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What the DeFi? A 10-minute Crash Course in Decentralized Finance

Decentralized finance doesn’t have to be difficult to understand. In fact, most people who have access to centralized financial systems will find it quite familiar. The truth is though, that DeFi is only half meant for people in developed nations. In my estimation, DeFi dates back to even earlier than the invention of Bitcoin. Before Bitcoin, there were several attempts to create a truly decentralized version of universal internet money. That part of the crypto story is often left untold. These earlier versions of internet cash aimed to solve a multi trillion dollar problem. Provide cheap and frictionless financial services to the portion of the population that doesn’t have access to financial services. There are some that attribute DeFi solely to the Ethereum ecosystem. I reject this notion, as I believe that all cryptocurrencies contribute to the budding phenomenon of decentralized finance.

Decentralized Finance DeFi Chart

The Unbanked

The unbanked population is thankfully shrinking all around the world. It is shrinking almost as fast as people are getting connected to the internet. People are gaining access to centralized financial institutions through the internet, which greatly accelerates their ability to manage their finances. There are still currently about 1.7 billion people in the unbanked population. The issue with this demographic is that they are also on the lower end of the spectrum in terms of wealth. This poses an interesting dilemma for financial institutions. In order for banks to make money, their customers need to make money. In a lot of cases, in order to make money, you need to have a bank account. Bank accounts provide customers with the ability to access credit, which can be the jump start needed to start a business, or pay for education.

Banks therefore have no reason to enter countries, or communities that are impoverished. The profits from being in these communities does not outweigh the cost of operation. This is where DeFi comes in. Decentralized finance is the phenomenon of cheap, global, digital access to financial services. It is exactly the right hammer, to hit the unbanked nail on the head.

The Offerings of DeFi

The world of decentralized finance is constantly evolving. New applications are being created every single day, each bringing their own unique spin on fostering the use, growth, and preservation of wealth. Decentralized finances brings the ability to have a free bank account, and an instantly available collateralized loan. It brings the ability to get paid for your attention, or for writing articles. Lastly, you may lend your funds in order to yield farm for passive income. Let’s take a close look at the many facets of DeFi.

Free Bank Accounts for All

Starting a crypto wallet might be the most empowering thing that the unbanked population ever do for themselves. Suddenly, they gain the ability to accept money for free, over the internet. If you already have a bank account, then you know that you’re charged a monthly fee. Even though the fee is $5.00 per month or so, this is an unmanageable expense for those in the unbanked population. After starting a crypto wallet, you gain the ability to accept money in a variety of internet currencies. Most crypto wallets will give you a single 12 word phrase which is your key to access dozens of cryptocurrencies. Then, it is quite simple to interact with the plethora of decentralized applications (dApps) that enrich the cryptocurrency industry. dApps aside, a free bank account is a revolution all in itself.

Instant Loans

Yes, within the realm of DeFi, you can gain access to money instantly, without a credit check. There is a catch though. DeFi loans are almost always collateralized. This means that you need to provide proof that you can pay back the loan, in the event that you cannot pay back the amount you borrowed. The way this is done within DeFi, is by locking already owned digital assets. So you are able to lock away your bitcoin or ether, in exchange for a lesser amount of money that you pay interest on. This complication aside, many people are happy to use this due to the instantaneous nature of the loan.

Get Paid for Your Attention, and Contributions

Collateralizing a loan is a non-starter if you don’t have money in the first place. That’s where earning money comes into play. Within the cryptosphere, there are many ways you can earn money, and save it in your crypto wallet. Simply by using the brave browser, you can earn a small amount of basic attention tokens (BAT) for each advertisement that you view. Or you can consider signing up for, a site that rewards both the reader, and the writer with cryptocurrency.

Loaning and Yield Farming

The latest craze to hit the world of cryptocurrency is yield farming. This is where people lend their funds to decentralized exchanges, or borrowing services, in exchange for interest on their loaned amounts. Yield farming is actually an amazing invention under the hood. It makes decentralized exchanges more robust by using the users loaned cryptocurrency as liquidity for traders. These decentralized exchanges charge a fee for the service, and users that have loaned their money earn a cut of the fees. This is the mechanism by which users can use their money to generate passive income.

Users also have the ability to loan their money to a dApp that sets up a borrower on the other side. Effectively, you could be loaning to individuals all over the planet. Remember how DeFi allows people to obtain collateralized loans? This is the other side of the equation. The cash obtained from a collateralized loan needs to come from somewhere. If you’re considering loaning your money to a DeFi protocol, then you can actually rest easy knowing that the borrower has supplied collateral. Most lending protocols are safe to use, but in any case, exercise caution and read reviews before putting your money into a dApp.

DeFi the Disruptor

Any way you look at it, DeFi is disrupting the traditional financial industry. It looks like DeFi is able to do anything centralized finance can do. In some cases, DeFi actually does it better. For example, banks will always have a hard time giving an unbiased free bank account to every single person on the planet. But like with anything, there are tradeoffs. DeFi is extremely new, and so caution should be exercised with every dApp you are considering interacting with. Be careful not to succumb to FOMO or shiny object syndrome. There have been several DeFi projects that follow the classic scam of a pump and dump. As the niche grows and matures, truly legitimate actors will be able to offer seriously competitive products to the products offered by centralized banks. 

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About the Author

Keegan Francis

Keegan Francis is a cryptocurrency knowledge expert and consultant. He recognized the opportunity in cryptocurrency early in his career and has been invested in it since 2014. His passion led him to start the Go Full Crypto, a project that documents his journey of totally opting out of traditional financial services. Keegan has been living entirely off of cryptocurrencies since 2019.

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