What is DeFi?
Decentralized Finance (DeFi) is a blockchain-based form of finance that does not rely on a centralized agency to hold/control our money and make financial decisions. It is a financial system that is permissionless, transparent, decentralized and trustless. These might be difficult sentences to fully imagine as for hundreds of years we have never come close to experiencing such levels of transparency, freedom and fairness. To cut things short, when we have a new system of financial services (money & the ability to transact, lend, borrow and trade it) which cannot be controlled by a centralized group of people like governments, banks etc, & is transparent, bias-free. We have DeFi.
How does it work?
Many cryptocurrencies like Bitcoin & Ethereum are not backed by physical commodities or precious metals like in the case of fiat currencies. But in spite of this, they do have value- value derived from limited supply, speculative demand and utility. There is also another section of cryptocurrencies called stable currencies (like USDC, DAI etc) that are minted (created) by providing a valuable backing. Hence at this state of things, one can say without further debates that cryptocurrencies do have value, though their means of deriving the value is pretty unconventional.
With the value established, transacting using cryptocurrencies for some goods/services is easily imaginable. But you may be wondering how can loans, international transfer, interest rates etc work especially since there isn’t a central agency keeping track or insuring lended money. All these are possible due to Smart Contracts, because cryptocurrency is programmable money! For example, while swapping from one crypto currency to another using a DEX (decentralised exchange), the smart contract checks if you have enough funds to perform the particular swap and also makes sure the swapped crypto is automatically sent to your wallet. The same applies when taking loans, trades etc – the underlying conditions and governance are programmed and there is no need for trust on an agency to operate.
Why is DeFi important?
DeFi is important as it starts from the limitations of the conventional financial system. The present system for example requires a lot of paperwork, permission, time etc before one can process an international transaction. One also needs to change from a national currency to another, requires intermediaries, high transaction fees, a lot of confirmations etc. All of these can be avoided by using cryptocurrencies. Since they are not associated with any country or region, their value and acceptance is global & and transactions can be done in an instant without heavy fees, agents in the middle or paperwork.
There are also deeper problems that DeFi addresses like transparency and democracy. Presently, governments and banks are strictly closed systems which do not have transparency in terms of what happens with our money or who gets to use it (deposited amounts). This infrastructure has given rise to many billion dollar scams. Also, the rich, privileged section of the society is treated with extra efficiency in operation, borrow amounts and flexibility. DeFi erases all these biases and presents to us a truly fair & transparent way of handling money.
Benefits over Centralized Finance
– Better interest rates on your assets
– Easier & faster transactions
– Accessibility for everyone and 24/7 availability
– A transparent network that can prevent scams
and an imaginative, passionate community of developers launching cooler, better projects everyday – the ecosystem is thriving without doubt. Surely, the next generations of financially literate people will have a more efficient financial infrastructure in their hands.
Our Top Five Picks
We’ve researched hundreds of crypto projects over the last year, from our research we have identified the top five Decentralized Finance projects that we like the most. Our decisions come from several factors, including but not limited to:
– Project Fundamentals
– Development Team
– Potential Longevity
– Project Community
The time-consuming hard work is done, our research has been compiled into 5 easy-to-digest reports highlighting our 5 favourite DeFi projects for 2021 & the foreseeable future.