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If you ask the internet what DeFi is, Wikipedia will tell you:
Decentralized finance (commonly referred to as DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum.
And we’re sure that the above definition satisfies all your crypto-questions. Just Kidding.
Let’s talk about money. Not direct deposit money, or printed president money, or gold bars, or buffalo nickels – but the first transaction system – bartering.
Money traditionally has two sides; physical, and representational. The first form of money (as we’re familiar with it today) was the Mesopotamian Shekel which was minted around 5000 years ago. Before money, people “paid” with things like shells and livestock but it’s not so easy to transfer a herd of cattle, so coins became a marker to represent the actual wealth that was being used as payment.
It all evolved from there. The main lesson we need to take with us from financial history is that transaction convenience is a market driver.
The history of the stock exchange is long and complicated. For our purposes, we’re going to fast forward through the Venetians, East India Company, New York, and the intricate details of the S&P 500 Index. Why? Because to understand the viral nature of blockchain, we need to first zoom in on the turning point – when the stock exchange went fully digital.
The Nasdaq, or National Association of Securities Dealers (NASD) which has evolved into Financial Industry Regulatory Authority(FINRA), is not a brick and mortar institution. It is a network system that manages regulated stock transactions.
Digital means Global. Taking the necessity of a physical port away from financial trading opened up entirely new pathways for trade between countries and international commodities.
Now for the trillion dollar question, how does this apply to Crypto?
Consider this perspective:
NASDAQ is to Global access as Amazon is to international shipping.
CRYPTO is to NASDAQ as viral TikToks are to the internet.
Amazon doesn’t have hubs everywhere just yet – and neither does NASDAQ, countries such as Afghanistan,Andorra, Belize, Burundi don’t have a stock exchange which means limits to access – in the same way that Amazon does not ship to all countries.
Though not 100% legal in every country, Cryptocurrencies are harder to regulate, and are generally more widespread than the reach of traditional or intensely regulated exchanges.
Legal map of Bitcoin and other cryptocurrencies. Source: Coin.dance
Think of Blockchain as a database of hashtags. Each tag, or Block is its own ledger of transactions. Together, each block makes up a network that is duplicated and sent to every system connected to the chain.
Blockchain tech can create different types of ledgers; temporary, private, public, permanent, etc. used to store data for particular entities like payments to vendors, or Bitcoin transactions.
Cryptocurrencies like Bitcoin run on blockchain technology and can have their own privacy settings that they host using Blockchain (which is a transparent ledger recording database). The biggest bonus to running on Blockchain is the encryption capabilities which provide security to the users and traders of crypto that the individual currency providers may not necessarily implement.
Cryptocurrencies like DogeCoin and Ratcoin are value-tied to their usage, and their usage is tied to hype..
Blockchains can be either public or private but for a public blockchain, adding a transaction to the chain is made by consensus. Meaning the majority of the network (chain) has to agree that the Transaction is valid. The people participating in the chain are incentivised to verify transactions through rewards.
Decentralized Finance (DeFi) is the encompassing term for apps that facilitate blockchain and cryptocurrencies, though it is heavily linked to the cryptocurrency Ethereum which handles direct contracts and transactions – cutting out intermediaries. The goal of DeFi is to take everything in the financial world and decentralize the process by putting it on the blockchain.
Financial products decentralized by DeFi include; exchanges, launchpads (IPO equivalent), loans, and staking (savings account equivalent), to name a few. DeFi makes finance more accessible to the general public, all that is needed is a device that connects to the internet.
Take property for example, DeFi can take an existing or newly created property, tokenize it, put it on the blockchain, and make it accessible to anyone in the world. It’s essentially decentralized real estate.
What’s the big deal with decentralizing everything in the financial world anyways? Well, centralized finance has gatekeepers and limits set to control transaction frequency, trade times, speed, and user access. The biggest caveat to centralized financing is the lack of transparency in the market. This leads to insider trading in the market, along with any other potential misconducts. Blockchain solves this by helping to level the playing field by allowing anyone to access information regarding trades on the decentralized exchanges since blockchain is public by default.
Think of DeFi as Blockchain with enhanced adaptation abilities. Blockchain simply supports transparent transactions among a network, DeFi can support more complicated processes like token locks (projects will lock up tokens to drive up value), oracles (reliable data from the real world), liquidity providers, non-fungible token (NFT), supply chain management, options trading, just to name a few.
Cryptocurrencies are challenging for a lot of people to wrap their mind around because it’s not a simple concept, or a physical representation of currency.
Crypto, Blockchain, and their contemporaries are tech-based and while currencies like Bitcoin are stabilizing, there are fringe currencies like DogeCoin, etc. that are highly volatile and depend entirely on popularity (similar to driving up stock commodities through hype).
Before we wrap this up, let’s look at some of the possibilities of a Crypto future:
There has been a lot of debate on whether or not cryptocurrencies are a digital resurgence of the barter system. DeFi is independent of banking institutions and governments – meaning it’s about as democratic as you can get when it comes to money by being peer-to-peer (P2P).
In networks, P2P represents systems that are directly connected to one another via the internet, and files can be shared without needing a centralized server.
This is the concept that crypto embodies, and P2P valuation is at the heart of the barter system. The pro is inclusivity and value independence. The Con is value volatility and hard to stabilize currencies.
What do you think about the future of currency? Regardless of your opinion it’s clear that tech and DeFi app development will play a key role. We’re here to help you navigate and build out solutions to the ever-changing landscape. Reach out to us today to learn how we can help!