What is DeFi?
The crypto-sphere has been receiving quite a bit of frenzy lately. If you are familiar with crypto, you have probably heard the word DeFi thrown around in conversation or seen it floating around online.
But what does it actually mean? And how is DeFi actually changing the financial world?
DeFi stands for Decentralized Finance, which is a new form of finance that operates on blockchain and does not depend on traditional centralized financial systems such as brokerages, banks, and exchanges.
Woah wait, but what is blockchain?
Did someone say blockchain?
Blockchain is a digital ledger that stores every transaction between every party on the chain.
DeFi works on a decentralized blockchain, which provides a copy of the digital ledger to everyone on the blockchain. So what does this mean?
Our traditional financial systems for example, Chase Bank, have a centralized bank ledger that sits in one building.
The ledger can only be viewed if you are in the same building and leaves zero transparency for anyone who has made transactions that are stored on that ledger.
DeFi solves this issue by providing a digital ledger of every transaction to everyone who is on the blockchain.
Each person can see a copy of the complete digital ledger, providing complete transparency of every transaction.
So back to DeFi…
Centralized financial systems have been around since the creation of finance. The traditional financial system is centralized and depends on middlemen to handle transactions between one person to another.
For example, if someone wanted to buy a slice of pizza, they would make the purchase with a credit card, and Visa would handle the authorization.
Visa is a centralized entity that is responsible for approving, denying, and canceling the transaction.
PayPal is an electronic financial system that may seem new and cutting edge to traditional financial systems, but PayPal still relies on a centralized middleman just like Visa to process the transaction.
DeFi is a peer to peer system created to cut out the middlemen, mitigate unnecessary centralized archaic processes, and provide financial transparency.
This peer to peer platform is handled by smart contracts, which are computer transactions that become fulfilled when both parties agree upon a specific contract.
Smart contracts were first created on the Ethereum network. The majority of all DeFi projects are hosted on the Ethereum blockchain.
What is an example of DeFi?
Maker and Compound were the first DeFi lending protocols created. As of this current writing, Maker has billions of dollars locked up in a digital vault, ready for lending.
Although money is locked up in the Maker digital vault, it isn’t dollars, it is a cryptocurrency stablecoin called DAI. Stablecoins are engineered such that they hold a stable value around whatever they are designed for.
In the case of DAI, the stablecoin hovers around $1 to mimic the actual dollar bill. Both Maker and Compound act like central banks, and DAI is the currency that is able to be borrowed or sold throughout this process.
Borrowing or lending interest rates vary depending on the specific DeFi protocol that you choose. With the explosion of DeFi protocols,
Compound created a token called COMP, which is given to those who are lending cryptocurrency on the Compound platform.
This token can be thought of as a rewards coin for staking money on the Compound platform and providing more liquidity within the protocol.
With the invention of the DeFi digital bank and the removal of middlemen and archaic processes, one can now act and provide circulating funds just like a bank.
As someone borrows a loan, they have to pay a higher amount of DAI for collateral coverage. This additional charge paid out, is for “minting” of more DAI.
Once the loan is eventually paid off, the DAI is burned to help equalize the stablecoin’s value.
How do I start using DeFi?
To start becoming a DAI DeFi lender, you will need to have a cryptocurrency account on a secure exchange so that you are able to buy DAI, or you can buy ETH which you can then convert to DIA. Coinbase has DAI listed on their exchange.
To sign up for a Coinbase account head over to coinbase.com and fill out all the profile information and link the exchange to your bank account.
Coinbase is a company based out in San Francisco and has an actual gumball bitcoin machine in their offices. Coinbase and Gemini are the two largest cryptocurrency exchanges based in America.
After registering and being verified on Coinbase, buy as much DAI as you would like to stake on the Compound platform.
You can then navigate to the Compound App and connect your Coinbase wallet or other types of cryptocurrency wallets.
Once you have connected your wallet you will see a Supply and Borrow button. Enter the amount of DAI you want to supply and click confirm.
Once this processes, you will now begin receiving passive income for your staked DAI on the Compound platform.
What’s next for DeFi?
There are so many applications for DeFi that it is easy to say, the DeFi future is so bright.
The current craze is yield farming. It is much like the digital bank example with Compound and Maker except there are higher yields for locking in your cryptocurrency.
Yields of 8.6% per USDC and 6% return for Bitcoin on Blockfi have been reported at the time of this article.
Yield farming presents higher risks but higher interest rates. To learn more about yield farming visit Coin Telegraph to learn more.
