What is DeFi?
DeFi is a collective term for financial products and services that are accessible to anyone who can use Ethereum, which is anyone with an internet connection. With DeFi, the markets are always open and there are no centralized authorities who can block payments or deny you access to anything. Services that were previously slow and at risk of human error are automatic and safer now that they’re handled by code that anyone can inspect and scrutinize.
There’s a booming crypto-economy out there, where you can lend, borrow, long/short, earn interest, and more. Some crypto-savvy DeFi users have used DeFi to escape crippling inflation. Companies have started streaming their employees their wages in real-time.
Some users have even taken out and paid off loans worth millions of dollars without the need for any personal identification.
DeFi vs Traditional Finance
One of the best ways to see the potential of DeFi is to understand the problems that exist today.
- Some people aren't granted access to set up a bank account or use financial services.
- Lack of access to financial services can prevent people from being employable.
- Financial services can block you from getting paid.
- A hidden charge of financial services is your personal data.
- Governments and centralized institutions can close down markets at will.
- Trading hours are often limited to business hours of a specific time zone.
- Money transfers can take days due to internal human processes.
- There's a premium to financial services because intermediary institutions need their cut.
- You hold your money
- You control where your money goes and how it's spent.
- Transfers of funds happen in minutes.
- Transaction activity is pseudonymous.
- DeFi is open to anyone.
- The markets are always open.
- It's built on transparency – anyone can look at a product's data and inspect how the system works.
- Your money is held by companies.
- You have to trust companies not to mismanage your money, like lend to risky borrowers.
- Payments can take days due to manual processes.
- Financial activity is tightly coupled with your identity.
- You must apply to use financial services.
- Markets close because employees need breaks.
- Financial institutions are closed books: you can't ask to see their loan history, a record of their managed assets, and so on.