DeFi, short form for decentralized finance, uses applications on blockchain technology that make transactions between different parties possible without involving centralized parties. A blockchain is a decentralized public ledger or database designed for running digital assets, such as cryptocurrencies.
DeFi platforms are also involved with crypto lending, investing in cryptos, and sending cryptos. Some of the popular DeFi applications today are Curve Finance and Uniswap. Unlike a couple of years back when DeFi was just emerging, the industry has now grown and is worth billions of dollars.
According to Johann Kerbrat, the CTO at Robinhood Crypto, DeFi aims to help transfer value in a transparent and auditable model without involving gatekeepers or 3rd parties, just like the internet allows free data transfer.
DeFi versus Traditional Banking: What is the difference?
The standard or traditional banking (TradFi) uses the know-your-customer (KYC) procedures to verify clients’ identity and legitimacy before getting into any business. This means that to use traditional banking, you have to prove you are who the papers indicate you are.
To borrow cash from banks, you must undergo credit checks and further proof of identity. Most banks even go a step further to verify the income. However, DeFi deviates from this model in that customers are allowed to operate anonymously and maintain their personal details and identity secret. All that you need is a digital asset, such as Bitcoin (BTC) or Cardano (ADA).
Instead of using TradFi, DeFi clients enter into smart contracts that serve as the intermediary to ensure every involved party sticks to the agreed obligations. Smart contracts were first developed in the 1990s by Nick Szabo, but they became more popular starting in 2015 when Ethereum adopted them in its blockchain.
Conor Devlin, the Head of Business Development at HederaStarter, agrees with Vitalik Buterin that smart contracts are crucial in improving processing speeds and transaction reliability.
DeFi is promoting fast access to create a fluid financial system that is open to all without barriers. No matter where you are located, be it in Europe, America, Africa, or South America, the only thing required to get DeFi services is access to the network. Olaf Carlson-Wee, the CEO of Polychain and early investor in cryptos, describes Defi as an “earth-shattering level of importance” that will touch on all financial instruments.
When using the traditional banking system, we must also indicate that most banks require a minimum deposit, about USD 25-1000, before allowing users to open bank accounts. If you want to work with a saving account, it will require an additional minimum balance and monthly maintenance.
DeFi according to Romain Chiaramonte
According to Romain Chiaramonte, DeFi does not have any barrier to joining. Whether you want to join a platform like Compound, which focuses on loans, or Yearn Finance which focuses on lending and trading cryptos, Chiaramonte explains that the main requirement is internet access and a crypto wallet. No minimum balance of funds is required. Be extra careful because the loss of your password could mean the cryptos are lost forever.
To start using DeFi apps, start by creating a crypto wallet using companies like Frame and MetaMask. Then, buy some cryptos.
Why DeFis are a Big Deal
The champions of decentralized finance (DeFi) indicate that it is marking a fundamental shift in the way people interact with finances and then expanding this world to those who might be interested. However, opponents indicate that the lack of regulations makes it risky because it is prone to scams. In 2021 alone, over USD 10 billion was lost from DeFi platforms.
DeFi platforms have also become an easy avenue for money laundering. In 2021, Chainanalysis indicated that about USD 8.1 billion was laundered via DeFi platforms. Michael Hsu, the US Comptroller of Currency, compared DeFi to “fools of gold rush.”