Finance 2.0 is here: DeFi

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The financial ecosystem is no longer working for the average person; Defi is rebuilding it from the ground up

Part 1:

Get ready for a primer on the future of the financial ecosystem. In this series we’ll take your knowledge from 0 to 100 so you can not just know about what’s coming, but actually take part in the future of finance.

The Finance space has grown tremendously in the 1900s and into the 2000s with incredible innovations. But in recent years it has become appallingly clear that the vast benefits and value of the system are no longer serving the interests of the many stakeholders and users of the system. It has fallen victim to corporate greed.

With the advent of blockchain technology and subsequently smart contract platforms like Ethereum, it’s now possible to build any kind of application that can be used from anywhere by anyone. What’s being built now will blow your mind.

DeFi is blowing up the way that money flows within an economy

It’s difficult to build a financial ecosystem from the ground up, infinitely more so when the builders aren’t working under a single figurehead who is guiding their direction. The builders here are anyone that wants to participate, anywhere in the world. That’s decentralization. We started in 2015 with the currency: Ether, the native currency of the Ethereum blockchain. Quite similar to Bitcoin, but it goes a step further to allow code and functions to be executed. It’s a computer that the entire world can use. The applications that run on this computer are called Decentralized Applications, or dApps for short. These dApps are powerful because they don’t run on any single device, rather they are spread across the entire network, so they can’t be easily switched off. The recent explosion in finance dApps has spawned it’s own ecosystem known as Decentralized Finance or DeFi.

Total amount of Ether locked in DeFi is at an all-time high, and continues to grow as new applications are released and get increasingly interconnected.

These dApps are recreating the legacy financial world and improving upon it while doing so. Among the first dApps was a stable currency (pegged to $1 USD) token to remove volatility from the system. This was the key foundation for building the ecosystem. After that came the lending dApps which allow people to borrow or loan money with collateral backed loans. The interest rates are algorithmically set, so the rates are purely market driven.

Comparing various DeFi borrowing rates to legacy providers we see that rates are similar, however lending/return rates are vastly different. DeFi is giving the money earned through these loans back to the lenders, unlike legacy financial institutions.

As we can see from the rates of return, DeFi gives you a much better rate than legacy finance.

Why?

There are no huge corporations sitting in the middle and sucking up profit, so it goes back to you, the end user who is providing the money to be lent out. How it should be.

DeFi is just better than legacy finance. Here’s why:

  1. Better interest rates- On the borrowing side the interest rates are riven by an algorithm that fluctuates with supply and demand.
  2. Loans for everyone- Anyone can take out a loan at any time. No longer are people at the mercy of an institution to decide if they are credit worthy or not. As long as you have collateral for a loan, you get the loan. This means rates for “high risk” borrowers are often better than the alternatives.
  3. High return rates for lenders- The money made from these loans goes right back to the lenders. Think you can get 8 or 10% interest from your bank’s savings account? Dream on. But in DeFi it’s pretty standard.

TLDR; Banks suck, DeFi is making a new ecosystem that sucks a lot less.

The next step is more complicated financial instruments like derivatives, margin trading, synthetic assets, and futures. We’ll be exploring these and other aspects in the next segment, which can be found here.


Finance 2.0 is here: DeFi was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.