DeFi is a term that has been buzzing around recently. It is not alone in this though as it would seem like formal institutions like big tech, Hollywood and even governments have integrated the social media culture of using hashtags and evolved them into buzzwords. Acronyms and conjoined words like AI, web3, DeFi and many more are floating around in the ether, permeating everyday conversation. Geeky is the new cool apparently.
Long live the texplosion!
See what i did there?
But even though this permeation of the tech culture into daily life is informative and cool, we face the real risk of these important terms wearing away into the nothingness of overused cliches which everyone uses but not many can give a simple explanation to in everyday terms.
Fraudsters everywhere rejoice!?
Such widespread adoption of these not so understood buzz words only seems to be benefiting fraudsters who have already leveraged on this underinformed-craze-for-the-new-and-cool to fill their illusive pockets, by launching one new scam after the other.
Even on the “invincible” blockchain, several scams and hacks have already been reported with people loosing large sums of hard earned currency to the vacuous space of the software world.
This phenomenon is not new however. Like all promising new frontiers in history, people seem to have developed a rather naive trust for anything tech related. We never stopped searching for the cure all did we?
The aisle of life! The holy grail! The new world! The wild west! The dotcom boom! Decentralized finance!?
At least the wild west was kind of honest. In all these great quests, people risked a lot to win the great boon that was promised but in many cases informed people just used the idea to make themselves richer off the more gullible folk. DeFi runs this real risk!
Hence, it is imperative for people to be well informed on the actual promise of DeFi and not the hype. This can be achieved with a good, day to day understanding of what it really is.
So, lets anchor the waiving flag of our mindset, dancing on the winds of information age experience to the deep rooted pole of basic, day to day understanding.
The concept of DeFi
DeFi which is short for “Decentralized Finance” basically means financial services without middlemen. It is known as transparent or trust-less banking because of the lack of middle men. The middle men being eliminated here are banks and other financial institutions. Wondering how this is possible? One word; software!
Creating software involves using programming languages to write algorithms - step by step procedures of doing things - for computers to work with. The fact is that most jobs involve doing repetitive tasks. Financial service jobs too. Hence, in decentralized finance, we teach computers how to do finance jobs like creating currencies (cryptocurrencies), stock exchange (Decentralized exchange), foreign exchange (cross chain technology) etc., then we access these services through apps known as Dapps (Decentralized apps).
People can then transact directly with anyone around the world without need of any middleman. Cost saved and stress minimized, everyone seat back and sip your tea. Yay!?
But who will regulate these transactions you may ask? Smart Contracts on Blockchain Technology!More buzz words right? I’ll explain.
The Blockchain is a public digital ledger which keeps record of all financial transactions related to it and Smart Contracts are executable protocols in software form which govern how transactions occur on the blockchain. These two run the show in the world of DeFi. Well, together with the programmers who build them right? (Wink wink!)
But enough with the introduction. What will a DeFi world look like in day to day living? How will we ensure that we are not just moving ourselves from the control of financial institutions into the clutches of even less regulated programmers? Come with me, and imagine!
Imagine the world of DeFi
Imagine a bank of the people where the rules of running it are suggested by experts and are voted on by the general public over the internet. In such bank, anyone can mint, save, lend or deposit money, and anyone can trade stock following the set rules. Then these rules are coded as algorithms by programmers to build a software system and the code is made publicly available, so that anyone can learn a programming language and verify it. Solves the problem of programmer dishonesty right? Mostly at least. The system is then made available for public use.
The system we just imagined is what is known as decentralized banking and such method of developing software is known as open source development. The individually mintable currencies are cryptocurrencies. The governing rules of the system written as algorithms are known as smart contracts. Smart contracts are the building blocks of decentralized finance.
Now imagine a software program that keeps record of all transactions on the software system for accountability and regulation. That is, a digital ledger of the decentralized banking transactions.This kind of ledger is what is called the block chain.
Now imagine that we have several of this digital ledger, each with its own currencies and banking protocols. An issue then arises because each ledger and it’s financial tools are isolated, and each is limited on its own because people want to enjoy the benefits of all the ledgers without having to register on each and every one. They may also want to convert currencies on one ledger to currencies on another ledger for one reason or the other. Hence, the need arises for the ledgers to become linked together. Imagine that this is accomplished and the software system becomes a network of systems.
This network of systems imagined is known as cross chain technology.
Now, imagine that several apps are created to allow people connect to this network of software systems with financial services and digital records, and transact with each other on a peer to peer basis. The makers of the apps compete with each other for users like banks, by offering benefits e.g., users can get interest by depositing currencies on a particular app. Also, because the users are now on a network, groups can be formed to make collective decisions that will influence the functioning of the network.
The apps just imagined are known as decentralized apps or Dapps, gaining interest on crypto deposited on Dapps is known as yield farming and the groups formed to influence the functioning of the network are known as Decentralized Autonomous Organizations (DAOs).
Finally, imagine a software tool that allows you build such incremental system with possibilities of the continuous future updates just demonstrated and think of an overall name for everything we just described.
Substrate is one of such software tools that helps you create the financial network just described and if you’ve followed keenly to this point, then congratulations sojourner, you just toured the idea of Decentralized Finance (DeFi)!
Why you should be enthusiatic about DeFi
- It will create a transparent financial system
- It will minimize the cost of financial transactions
- It will minimize or eradicate financial malpractice by financial institutions
- It will minimize or even eliminate the need for paper money which wastes resources
- It will democratize financial services
- It will create a fair playing field for everyone to benefit from financial services
Why you should not be naive about DeFi
- Digital infrastructure can be hacked or tampered with
- Anyone can create Dapps or offer finacial services on the network which creates room for scams
- Jobs will be taken away from people working with traditional financial institutions
Conclusion
DeFi is a promising new frontier currently being developed that could radically transform how people transact around the world. With all its possible benefits, it is important for people to embrace such promising technology but it is also imperative that they properly understand the many ways such technology can cause problems. DeFi seems to be a double edged sword. And a double edged sword must be handled carefully to properly wield it in doing the most good.
