DeFi may sound fancy but, as we’ll learn, it is very important when it comes to the future of cryptocurrency and finance.
DeFi has the potential to address many of the flaws in existing financial systems, including giving the unbanked population access to a financial system.
Also read: Mark Cuban sides with Ethereum
Further down the track, DeFi has the potential to offer improved clarity and more robust security while replacing many outdated protocols.
What exactly is DeFi?
If you haven’t noticed, there’s a booming cryptocurrency economy. You can lend, borrow, earn interest and trade to make a profit.
Dan Edleback, co-founder and CEO of Exidio explains:
“Decentralized finance, or DeFi, is a term used to describe a system by which financial products become available on a public decentralised blockchain network.
"That makes them open to anyone to use, rather than going through middlemen like banks or brokerages.”
None of the traditional identification requirements of those existing institutions is required for DeFi, meaning it is virtually untraceable.
One example is how crypto-savvy Argentinians have used DeFi to escape inflation, which is crippling their economy. Companies have started paying their employees in DeFi.
So, how does DeFi work?
“DeFi refers to a system by which software is written on blockchains,” Edleback explains.
"This makes it possible for “buyers, sellers, lenders, and borrowers to interact, peer to peer, or with a strictly software-based middleman, rather than a company or institution facilitating a transaction.”
Think of it like this, the markets are always open and there aren’t any centralised law-enforcers who have the ability to block your payments or deny access to a particular financial platform.
And why do we need DeFI?
As the world evolves post-coronavirus, we are slowly beginning to understand that digital currency is here to stay.
The days of the ‘Bitcoin fad’ are over as the many benefits of decentralised finance are becoming more and more abundant.
Last week, the Minister for Women's Economic Security, Jane Hume, expressed her confidence in the future of decentralised finance.
According to Hume, the sector “presents huge opportunities” for Australia to transform into a “frontrunner for innovation and economic progress".
During her address to the Australian Financial Review Super & Wealth Summit in Sydney, Hume expressed her optimism, saying DeFi was more than a fad.
She called on the Government and other industries to, “embrace decentralised finance because the technology is not going away anytime soon”.
On the contrary, she cautioned that anyone interested in investing in cryptocurrencies should “tread cautiously, but not fearfully”.
“If the last 20 or 30 years have taught us anything, it’s that all innovation begins as disruption and ends as a household name," Hume said.
"Decentralised finance, underpinned by blockchain technology, will present incredible opportunities. Australia mustn’t be left behind by fear of the unknown."
Edelback said El Salvador's adoption of Bitcoin as legal tender marked a huge turning point in the history of money.
He said it was the first time money was made by the people, for the people.
“Bitcoin, now legal tender, is being freely transferred between Salvadorans regardless if they previously had a bank account," he said.
"Digital assets empower them and grant access to the same banking standards as the rest of the world. This is a massive shift from the status quo.”
What can you do with DeFi?
There is an ever-growing list of things you can do with DeFi.
Here are just some:
Send money across the globe
Access stable currencies
Start a cryptocurrency savings account
Borrow funds with and without collateral
Fund ideas and business concepts
What are some of the key perks of DeFi?
Edelback says the important benefits of DeFi are that it is permissionless, censorship-resistant, globally accessible, and anyone can participate.
He says it opens up the entire world of finance and banking to the planet without anyone stopping them, and all that's required is a basic internet connection and a basic smartphone.
He says the barriers to entry are very low, and the capabilities of what one is able to access is incredibly game-changing.
More work is required to pave the way for mainstream adoption of cryptocurrency and DeFi, but we’re getting there.