Decentralized finance or defi is a term that comes up quite often when talking about blockchain and cryptocurrency. But what exactly is defi? Below we will take you through the need for defi, how it differs from traditional banks, Cred’s take on defi, and where we think decentralized finance is headed.
The best definition of defi is a technology set that aims to replicate and innovate on current financial service products using decentralized blockchain technology. In simpler terms, it mainly involves a brand-new financial system built on public blockchains. Two famous examples of defi are Bitcoin and Ethereum, vast open-source networks that allow anyone to create applications for financial activity without the involvement of centralized institutions like banks. At its core, defi is for the people, by the people.
With defi, there isn’t a single point of failure, because identical records are kept across thousands of computers through a peer-to-peer network (hint: blockchain). Because it’s permissionless, the open-source network is open to anyone despite their location or how much money they may have. Talk about inclusivity! Whereas a traditional bank can close the account of a less than an ideal customer, blockchains are censorship-resistant.
The need for decentralized finance comes from a number of the world’s population needing financial services and not having adequate access provided by traditional institutions—a figure equating to roughly 1.7 billion people. Yes, billion with a b.
The main driver for defi is decentralized applications or DApps. Luckily for the general population, DApps make it easy for anyone with a smartphone to access an array of financial services such as lending out money, earning interest on your crypto, and other advanced investment strategies.
Terms To Know:
- DApp – smart contracts that execute automatically when certain conditions are met and enable developers to build functions far more sophisticated than merely sending and receiving cryptocurrency.
- Blockchain – a system in which a record of transactions made in cryptocurrency is maintained across several computers connected in a public network.
DApps vs. Traditional Banks:
- Accessibility – Because defi apps operate without expensive intermediaries, they can reach the 1.7 billion population unable to access traditional financial services.
- Transparency – defi data is publicly available.
- Permissionless – Anyone with internet access can create and participate in decentralized applications without third-party interferences.
Cred’s Take on Defi
“There are things that are incredibly valuable and efficient about smart contracts but the question remains as to who would entrust 100% of their money to a fully decentralized custodian,” asks CEO, Dan Schatt. “We’re basically on this continuum from centralization to decentralization. There are parts of the technology which are fantastic at driving efficiencies that are decentralized, but there are others that still have a ways to go.”
Where does Cred fall on the Defi scale?
At Cred, we are leveraging blockchain to make the financial services much more efficient, but what is still needed are experts that know how to hedge volatile asset classes, to do the risk-management in underwriting, and to understand components of finance that are important to instill trust.
We’re working across 190 countries, lending tens of millions of dollars all around the globe. We can accept funding and lending in stablecoins or fiat, and lend it out in the course of 15 minutes on a Friday night when the traditional banking systems are closed. A fair amount of this process is decentralized, but not the core risk management and security functions.
What’s Next For Decentralized Finance?
Defi’s current issue lies in how countless organizations work independently of one another, thus creating a fragmented market. No one company can exert enough influence to move the defi industry in a particular direction. Additionally, cryptocurrency and blockchain as a whole have yet to be adopted into the mainstream.
Despite adoption woes, trends are seen across the decentralized financial space that shows promise of growth. One trend is the innovations in insurance, as defi continues to grow, smart contracts are becoming increasingly susceptible to vulnerabilities. Hackers finding and exploiting bugs on the open-source code is a persistent issue. Fortunately, companies such as Nexus Mutual are building decentralized insurance in the event of DApp hacks. Other trends are better overall user experiences. The latest versions of defi apps are prioritizing design and ease of use to take open finance to a broader audience.
No one can say for sure where defi and DApps are headed; it will first need to catch up with today’s financial services industry. But over time, it’s hard to imagine what innovations will come about when the power to build financial services is standardized to anyone who can write code. We are looking forward to seeing where defi is headed and contributing to the progress.