Decentralized Money in Etherium (DeFi): The Future of Money?

Decentralized money, or “DeFi” for short, has taken the crypto and blockchain world by storm. However, its recent resurgence masked its roots in the 2017 bubble era. While everyone and their dogs were making an “initial currency offer” or ICO, very few companies saw the possibility of a blockchain that was out of quick profit on price. These pioneers envisioned a world where financial applications, from trading to savings to banking to insurance, would be possible only in a blockchain without any intermediaries.

To understand the potential of this revolution, imagine if you had access to a savings account that earns 10% per year in USD but without bank and virtually no funding risk. Imagine sitting in your office in Tokyo doing a crop insurance business with a Ghanaian farmer. Imagine being able to become a marketer and earn a fee as a percentage of Citadel’s choice. Good to hear the truth? It’s not. This future is already here.

DeFi’s building block

DeFi has some basic building blocks that you should know before we move on:

  • Creating an automated market without an intermediary or clearinghouse or exchanging one asset for another without trust.

  • Being able to lend overcollectralized or “use your resources” for traders, speculators and long-term holders.

  • Stablecoin or algorithmic assets that track the underlying value without being centralized or supported by actual assets.

Understand how Defy is made

Stablecoins are often used in DeFi because they mimic traditional fiat currencies such as the USD. This is an important development because the history of crypto shows how volatile things are. Stablecoins like DAI are designed to track the value of USD with minor deviations even during times of strong beer market, i.e. crypto prices crash like the beer market in 2018-2020.

Lending protocol is an interesting development that is usually built on top of stablecoin. Imagine if you could lock up your million dollar assets and then borrow in stablecoins. The protocol will automatically sell your assets if you do not repay the loan when your collateral is no longer sufficient.

Automated market makers form the basis of the entire DeFi ecosystem. Without it, you are stuck with an inherited financial system where you have to trust your broker or clearinghouse or an exchange. Automated market maker or AMM in short lets you trade one asset for another based on the reserves of both assets in its pool. Price discovery occurs through external arbitrators. Liquidity is pooled based on other people’s assets and they get access to trading fees.

You can now gain exposure to a wide variety of resources in the Etherium ecosystem and never interact with the traditional financial world. You can make money by lending assets or becoming a market maker.

For the developing world, this is an amazing innovation because they now have access to the complete suite of financial systems of the developed world without any barriers to entry.