Why DeFi?

Decentralised finance (DeFi) refers to financial services that do not need third parties, instead they utilise smart contract technology to automate transactions in a distributed system. DeFI is an umbrella term for different financial applications and, by its very nature, is geared towards disrupting financial intermediaries, ie, Banks.

Smart contracts enable peer to peer lending / borrowing with returns paid to the individuals by way of Return of Investment (ROI). Due to the fact an intermediary is not required the % returns are far higher — believe it or not Banks currently do make money off you capital, despite them only paying 0.001% interest in return! DeFi looks to rebalance this.

Currently most DeFi applications are built on the Ethereum blockchain network, although we fast approach a time where platforms such as Cardano, Polka Dot, Elrond will start to compete. Examples of DeFi platforms include;

• Decentralised Exchanges — Uniswap, Sushi Swap, 1Inch
• Decentralised Saving / Borrowing / Lending — Celsius, Compound, AAVE

In each case these platforms allow individuals to buy, sell, save, borrow or lend without any central authority being involved. All manner of Crypto currencies can be used, Bitcoin, Ethereum, Chainlink to name three — stable coins such as USDC, Tether, Dai can also be utilsied.

DeFi is an evolution of the revolution that Bitcoin began a decade ago. In many ways, DeFi is what Bitcoin was pointing at — having sent up a flare Bitcoin has inspired a generation of coders to push things forward — to the extent that we are now on the verge of 3rd generation blockchain technology that can fully scale and bring DeFi to the masses.

DeFi requires loans to be collaterised, that is to say — if you want to borrow X you must put Y as back up — this allows the Smart Contract to redistribute the collateral in the event that a default is made. As an example, in the future it is entirely plausible we will purchase land or a house on a DeFi platform. The transaction’s deeds would be put up in a tokenised form on a blockchain ledger as collateral. If there was a default on the loan repayment, as outlined in the terms of the smart contract, the deeds will automatically shift to the lender. Since there is no need for lawyers or banks, the process will be fast and cheap. and this process can be applied to any transaction you can think of.

DeFi is a whole revolution within itself and its not hyperbole to state that Humanity has never had the ability to transact in such a manner — utilising a currency that has not been centrally issued with all transactions taking place without the need for a middle man. The possibilities are endless.

DeFi and the unbanked

In traditional unsecured lending, there is a legal requirement that both parties know each other’s identity and that the lender assesses the borrower’s capacity to repay the debt. In DeFi, such requirements do not exist; instead, everything is hinged on mutual trust, privacy preservation and the functionality of the Smart Contract. If person A is prepared to lend to Person B and the terms are agreed then a transaction can take place. This is hugely important for Continents such as Africa where Billions of people are locked out the financial world. In many cases it can be impossible for someone in Africa to prove they exist, they therefore have no chance of obtaining capital — DeFi makes the proposition that if you have a Mobile Phone and Broadband connection then there is liquidity awaiting to be accessed. Its worth making the point that individuals do not lend or borrow to individuals within DeFi, rather — liquidity is added to pools of capital which are then accessible to whomever wants them.

New Financial Reality

We have in front of us a new financial reality — one that makes the individual sovereign over their own Money with the ability to manage their own risk in line with rewards they may be seeking, all of this done without any central body being involved. Billions of unbanked will soon access capital markets and the gatekeepers that have redistributed wealth for so long will be no more. A decentralised future is a future that sees power pushed to the edges — for the many, not the few and DeFi stands to be as significant an invention as the Steam Engine, it could utterly transform our World.

Those that tuned in to the Gamestop / Robin Hood saga this week (wc 25.01.21) will fully understand how valuable decentralised systems are / can be. We need to be able to undertake our business without a central body having the power to deny / allow access. Free Markets should be free.

The future is decentralised. Get decentralised.

Originally published at https://www.thehodler.net on January 30, 2021.