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what is DeFi

In this series of articles I will be taking complex subjects and simplifying them. These are subjects that are impactful enough that everyone needs to know something about them, even if they don’t want to learn the complex details. You don’t need to know exactly how electricity works, but you do need to know how to switch on a light!

In this article we are going to look at DeFi

What is Decentralised Finance?

Bitcoin is decentralised money. DeFi is the rest of the financial system decentralised. If you haven’t read my article on Bitcoin yet, I would advice reading that first.

DeFi allows people to interact financially without there needing to be a bank or other third-party acting as a middleman. It does this via computer code called smart contracts which are shared across computers all over the world via blockchains. Think of this as similar to how the internet is not controlled by any specific entity.

There are blockchains that are not set up for these smart contracts such as Bitcoin and ones that are such as Ethereum.

DeFi Loans

What are the current applications of DeFi?

There are many applications of this technology. Here are three interesting examples:

1. Loans

With Bitcoin it is possible to send and receive transactions. With DeFi it is possible to do more complex things such as lend and borrow money safely without any middleman. This is achieved by the smart contract taking the borrowers cryptocurrency as collateral. The lender can then be assured that they will be paid back. Lending your cryptocurrency in this way is becoming an increasingly popular way for investors to earn interest on their holdings.

Projects offering this service include Compound and Dharma.

2. Automated Crypto Swapping

Rather than investors trusting their cryptocurrency with an exchange when wanting to move their money from one cryptocurrency to another, DeFi allows tokens to be swapped via a smart contract.

A current example of this is Uniswap which allows cryptocurrency tokens to be swapped without the need to send them to an exchange.

3. No Lose Lottery

PoolTogether allows users to pool their cryptocurrency which is then lent out via a smart contract. The interest from the loan is then collected and send to one lucky winner each month. Everyone gets their initial deposits back in full. While lotteries are normally not a sensible place to put your money, one where the ticket price is returned to you is certainly a lot less risky!

What does the future hold for Decentralised Finance?

DeFi is extremely new so it is hard to tell exactly how it will be used in the future. That said, it has the potential to change the world. When there is no longer a need for middlemen in the financial industry a world of choice normally reserved for the wealthy will open up to ordinary people.

Increased access to the financial world will mean more choice and more competition, leading to better products and better prices. DeFi is definitely worth keeping an eye on.

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