Decentralized finance, commonly referred to as DeFi, stands opposed to CeFi (Centralized Finance) or TradFi (Traditional Finance) as a way of utilizing the implicit qualities of blockchain – security, trust, and decentralized governance – to replace the financial services and institutions which have long played an outsized role in our day to day lives.
How Does DeFi Work?
DeFi exploded out the gates in 2020 and is considered by many to be one of the main catalysts of the late 2020/early 2021 bull run. Decentralized finance protocols promise to divert the rivers of money moving through the world away from the dead hand control the banks exert.
This is because the mechanisms which allow DeFi projects to pay interest on savings, loans, credit and mortgages, disburse large treasuries of funds to multiple parties, and function as exchanges for assets, are not being sourced from a singular entity that retains all control over the technological framework.
Rather, DeFi works through a distributed set of users all operating under the one common framework dictated by the smart contract, with its governance overseen by community stakeholders and its processes visible to all. In return for providing capital to these projects, liquidity providers are rewarded with various levels of yield to incentivize participation.
How Might DeFi Change The World of Finance?
It’s an alluring vision. It promises transparency, fairness and – perhaps most crucially – the access to capital for everyone, in a way that does away with credit checks and mortgage applications, as well as the other barriers to social mobility that are controlled by a single hierarchical third party – and all the malfeasance of public money, exploitative practices, and degenerate behavior we’ve come to expect from these institutions. Bitcoin was formed in 2009 as a response, at least in part, to the Chancellor of the Exchequer in the UK bailing out the banks. DeFi promises to finish the job. Heady stuff, then. And it’s probably why the banks are simultaneously reeling from and investing in the new cryptographic paradise.
Are All Crypto Exchanges Part of the DeFi Movement?
The simple answer is no. The blockchain market differentiates between two digital asset exchange frameworks – centralized and decentralized. The first operate as central entities that retain control over user’s funds and accounts, whereas the latter entails community-pooled liquidity and automated smart contracts. One is a crypto-friendly bank, whereas the other allows you to be your own bank.
What DeFi Applications Are Popular?
DeFi’s applications are wide-ranging. Some popular projects in the DeFi space include Uniswap, a decentralized exchange (DEX) that allows all assets to be traded without impediment, Maker, a crypto-collateralized stablecoin provider that provides loans and interest, Synthetix, a protocol that allows for the production of synthetic representations of real world assets, and Aave, which aims to provide the lending of any sum of money, such as buying a house or even paying your bills. The team at Numio aims to be the bridge to allow for people to access these types of financial products in a seamless manner around the globe while minimizing the level of complexities with these powerful products.
These are only the tip of a very large iceberg that promises to send the doomed Titanic of TradFi down into the fathomless ocean. DeFi is the natural evolution of the global blockchain project, and it will unlock the world of finance to everyone, leading to a more inclusive, friction-free approach free from the shackles of the traditional system which has long plagued financial access for people worldwide.