What Is DeFi and How Does It Benefit You?

by | Dec 9, 2021 | Blog, DeFi

When you start making money in life—whether it happens at a lemonade stand as a kid or a job straight out of college—it’s easy to think you’ll have full control over your finances. After all, you’re the one who’s making money. Shouldn’t you be the one who determines what happens with it?

While this answer should be an easy yes, the truth is way more complicated. Much of your financial freedom is restricted by rules and regulations that banks and major financial institutions have put in place.

For example, perhaps you want to create a bank account to store your money. If that’s the case, you need to meet all your bank’s requirements.

Similarly, maybe you want to access certain financial services or transfer money to someone immediately. In both situations, be ready to give all the power to financial institutions. They will determine whether you qualify for specific services, and they will decide how quickly to process your transfer.

In worse-case scenarios, banks and major financial institutions will even dictate if you get paid by blocking a deposit. If you’re a trader, they will also restrict your activities to certain hours of the day.

Ultimately, while you’re the one who’s earning your own money, you’re not the one who’s entirely in control. However, this reality is changing with the rise of decentralized finance (DeFi).

What is DeFi?

DeFi is an umbrella term that refers to financial services existing on blockchain networks, primarily Ethereum. And today, this ecosystem is big business. Research suggests that more than $100 billion of collateral is stored in these financial services, and upwards of 10 million consumers have downloaded MetaMask, a popular digital wallet that you can use to access DeFi systems.

However, when it comes to understanding the popularity of DeFi, it all starts with the fact that it’s decentralized. For example, consider the bitcoin blockchain. This crypto asset is a ledger that tracks and records transactions for everyone can see.

This characteristic makes it very hard to destroy bitcoin because no one person or entity is in control. A user can’t go rogue and suddenly change the rules that govern bitcoin. And a government agency can’t prevent the success of bitcoin even if it manages to stop a set of computers from supporting the digital asset. No matter what, there will always be other computers on the network with an entire record of transactions to guarantee the show goes on.

But DeFi takes this process a step further by allowing decentralized lending and exchanges to happen on blockchain networks like Ethereum. Unlike the bitcoin blockchain, which is all about recording transactions, Ethereum’s blockchain is about hosting programs that allow you to not only store money but send and receive value.

With DeFi, you have control over your finances and complete visibility into what’s happening with them. You also gain access to global markets and alternatives to traditional banking options and your local currency.

The Characteristics of DeFi

Given DeFi’s increasing popularity, it’s clear that there are some benefits to engaging with it. Specifically, people are moving towards these services because they have five key characteristics:

Openness:

If you want to use a bank, you need to open an account. This process requires a lot of personal information and paperwork. However, with DeFi, all you need is a crypto wallet to get started.

Privacy:

Many high-profile data breaches have made people wary of providing their personal data. But that hasn’t stopped financial institutions from asking for your Social Security number, government-issued ID, proof of address, email address, birth date, and more. With DeFi, though, you don’t need to provide any personal information to access services.

Flexibility:

Expensive fees, long wait times for transfers, and constantly asking for permission to move your assets are cornerstones of traditional banking and financial institutions. But DeFi doesn’t come with these hassles because you have control over your money as well as where it goes and what happens with it.

Fast-acting:

If you’d prefer for rewards and interest rates to update quickly, DeFi is the answer. These items can update every 15 seconds and are usually significantly higher than what you see on traditional Wall Street.

Transparency:

Since DeFi systems happen on blockchain networks, every transaction is available for people to see, meaning no one can lie or hide the truth, a benefit private corporations rarely grant.

These advantages are pushing people away from traditional financial institutions, and this trend shouldn’t come as a surprise. Consumers have always wanted more control over their finances, and now that it’s a possibility, people are understandably attracted to it.

How can you start using DeFi?

If you also want to start engaging with DeFi, you typically need to use decentralized apps (DApps) that are primarily available on the Ethereum blockchain. Once you sign up for an app, you can start enjoying five services with DeFi:

  • Lending Money: Lending your crypto is very easy with DeFi. You can do it immediately and earn rewards and interest every minute instead of once per month.
  • Getting Loans: You no longer have to go through a financial institution to get a loan. Instead, with DeFi, you can get a loan instantly without filling out any paperwork. You can also get short-term “flash loans,” which are usually unavailable at financial institutions.
  • Buying Derivatives: If you want to make short or long bets on specific assets, DeFi gives you that power. And this use case is essentially the crypto version of stock options.
  • Trading: Peer-to-peer trading is another great possibility with DeFi. In this ecosystem, you can trade certain crypto assets without any kind of brokerage.
  • Saving: Putting money away for the future is always important, and it’s possible to do with DeFi. You can store your crypto into alternative saving accounts and receive better interest rates than what you’d get from banks.

Ultimately, what you can do with DeFi is similar to what you can do with traditional banks and financial institutions. But the main difference is that there’s no middleman, meaning there’s no intermediary who’s making the process difficult or expensive for their own benefit. When you start engaging with DeFi, you’re the one who receives all the perks, not Wall Street.

DeFi is the Future

DeFi may be new and sound strange when you first learn about it. But this ecosystem is not difficult to access and enjoy. DeFi is simply a new way to approach your finances and a better way to manage your assets. It solves decades-long problems and puts the power in your hands. And as these benefits become more well-known, the DeFi ecosystem will likely become the main way people engage with their money.

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