9. Welcome to Defi
With an internet connection, some cryptocurrency, and a well set up wallet system, you can now take control of your wealth and put it to work in a matter of minutes:
- Near-instantaneous loans without the need of bank approval or paperwork.
- Earning real interest on your assets, instead of suffering from low, zero, or even negative interest rates.
- Invest in real estate on a fractional level, bring in rental income from a $50 investment, sell your "bricks" whenever you wish.
- Re-balance assets and put trading strategies on auto pilot
- Gain exposure and trade on the price of gold and other assets in a couple of clicks
These are only some of the amazing things you can do with DeFi, a series of innovative solutions being developed on the Ethereum network that are bringing about a real buzz to the space.
DeFi is short for Decentralized Finance. This means monetary investments, exchanges and transactions run on protocols, mathematics and code rather than by institutions and individuals. But isn't that what the cryptocurrency market is by it's very nature already?
Yes, but DeFi has taken this to another level.
It would be more accurate to think of it as open finance as some projects are fully decentralized, some partly decentralized and some almost completely centralized. The question is "Is that any better than what we have already?"
Decentralized finance benefits from many of the characteristics that blockchain technology possesses. These benefits include:
Autonomy – The money and assets that you own in a DeFi ecosystem are yours and yours alone. There is (often) no centralized authority, such as a bank, with the ability to freeze your account, seize your assets, or block your transactions.
Accessibility – There are an estimated 1.7 billion unbanked people around the world. Unable to access bank accounts, these people are at a disadvantage to pursue many financial opportunities. Centralized financial institutions don’t have an incentive to target this population. The revenue they would receive from providing services to the currently unbanked simply doesn’t justify the costs of reaching them. Because DeFi apps operate without expensive intermediaries, they can afford to reach those people.
Tradability – Synthetic assets, aka tokenized assets, are another aspect of DeFi bringing immense value. By creating tradeable tokens that represent, say, a portion of a real estate investment, you open up the investment for people who previously couldn’t afford it, to potentially having access from anywhere in the world.
Similarly, DeFi enables investors to trade more efficiently because they aren’t required to commit to an entire high-value investment at once. Instead, they have the option to buy or sell just a portion.
Transparency – DeFi data is publicly available, enabling you to keep service providers honest. For instance, you can easily check the reserves of a DeFi bank, shop around for accurate loan rates, or even track the transactions of public figures.
DeFi does have a significant number of benefits, but it’s not without its faults.
Giving individuals complete control of their money and assets is risky. Lost private keys, forgotten passwords, mistyped addresses – the list of ways you can lose your cryptocurrency is a long one if you're not careful about it.
Additionally, the complexity of smart contracts opens the potential for attack vectors that don’t exist in traditional financial systems. If smart contracts are not well written or audited properly, there is an even bigger risk of a malicious attack. Lookup the DAO hack to know more about that type of thing.
No one has a crystal ball, but the potential of DeFi is huge. It's often referred to as a 'money lego' system, because each system devised is able to plug in and work together in a mutually beneficial manner. It's potential could be visualised as follows:
Dai, Maker and Compound form some of the building blocks for the Defi ecosystem
DeFi has a lot of room to grow if it is to fulfill its potential
New technology and industries often bring significant risk as part of the package, but being an early adopter is what makes the potential for upside so huge. The more you interact with the space, the more likely you are to become confident towards it's future success.
Now that you understand buying crypto, transferring crypto and using web wallets - the groundwork is laid for interacting with these protocols in a seamless manner. You've come this far, so what we're about to do next you may well find easier than setting up your first Bitcoin purchase.
In the final post of the series, we're going to go through three protocols and experience the true power of Defi; Aave, Tokensets and RealT.
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