What even is DeFi?

DeFi, meaning decentralized finance, is a system in which anyone in the world can lend, borrow, send, or trade blockchain-based assets without having to use a centralized institution such as a bank or brokerage. 

Why should I care? 

Defi has the potential to revolutionize the future of financial services.

Think of how financial products are serviced today. When you deposit your money in a bank account you are: 

1. Giving up control of your assets to the bank. Now your every movement requires their approval and permission. 

2. Trusting the bank to have your hard earned cash available when you need to withdraw it. During the Great Depression we saw this system fail, which is why the government introduced measures like FDIC to restore the general population’s trust in banks.

Centralized financial institutions serve as gatekeepers, and the system requires trust in them and their policies. This trust is easy in some countries but not as obvious in others with high rates of inflation and corruption. In these markets, people often do not have access to a safe and stable place to deposit their assets, borrow money or make long term investments.

Contrast traditional finance to the decentralized financial system enabled by the blockchain. DeFi protocols abide by two key criteria: permissionless-ness and transparency. 

Permissionless-ness speaks to both end consumers and developers: DeFi applications can serve anyone in the world with an internet connection. No one can prevent you from accessing funds within your wallet, whereas with a bank your every move is subject to the approval of the bank. Additionally, any set of developers can confidently build upon these platforms, knowing that no central authority has the ability to revoke access in the future. 

Transparency refers to the immutable nature of DeFi platforms. Because it is decentralized, there is an unchangeable record of every transaction stored across thousands of nodes. This renders the record unhackable and unchangeable. Because the software is open source, all underlying code is perpetually available for review.

The Past

Bitcoin , gave us the distributed ledger in 2009. This was a revolutionary peer to peer service for digital asset transfer, but many saw the potential of the blockchain beyond this single use case. In 2015, Ethereum gave us the ability to create any application on the chain, launching a new world of Dapps, or decentralized applications. Today dapps thrive on multiple chains such as Avalanche and Solana. 

The Future

While we are still in early innings, DeFi is too big to ignore. DeFi is a collection of thousands of protocols and smart contracts on multiple blockchains. The collective value of the DeFi Ecosystem has reached a combined market cap of $148 billion, with more than $90 billion of that growth having occurred in the year 2021 alone. The use cases are very real and as these platforms improve and become more accessible, more and more people globally will be onboarded.