Why Use DeFi?

DeFi, or Decentralized Finance, is the paradigm shift from traditional financial systems (e.g. saving, borrowing, lending, trading, investing) to peer-to-peer finance that is automated and removes the middle man. For the first time in history, you don’t need to be interviewed by a gatekeeping banker for a loan or fill out lengthy forms with personal information to trade on an exchange.

Smart Contracts

DeFi is enabled by smart contracts – programs running on top of blockchains like Ethereum that execute automatically when predetermined conditions are met. These immutable smart contracts allow developers to build sophisticated Dapps, or decentralized applications, that operate exactly as programmed and are available to anyone in the world with an internet connection.

DeFi Dapps

The breakthrough of DeFi Dapps are that they are powered by code written on decentralized technology, rather than being controlled by centralized infrastructure that is managed by authorities, institutions, and intermediaries like the traditional financial system. There are many DeFi Dapps that you can already try today:

• MetaMask: for self-custody of your crypto funds, digital assets, and data; this gives you complete ownership of what is yours.

• MakerDAO: for generating Dai whose price is stable with respect to the US dollar and is collateralized with crypto assets; this allows you to hedge against volatility.

• Compound: for taking out a loan or lending your crypto to earn interest on it; this protects your rights to participate in economic activity regardless of your background.

• Uniswap: for exchanging one asset for another directly from your crypto wallet; this provides you with 24/7 open access to the market.

• Lido: for receiving yield and rewards by staking your crypto; this lets you tap into higher returns than traditional financial products.

In Code We Trust

I’m quite taken by the idea of DeFi Dapps with rules that are not controlled by institutions and its employees but are based on faith in code. Clearly, many others share this faith, too, with more than $70B locked up in DeFi at the time of writing.

With decentralized money, we will also need decentralized finance. DeFi not only allows more people who are excluded from traditional financial systems to have access to financial products, but will also allow quantum leaps in what’s possible with money that we have never seen before.