What is Defi (vs Centralized Finance)?
Defi is short for Decentralized Finance. What does this mean? Let's start by looking at the definition of the two composite words. First word is finance - which is the management of money. Currently done through an intermediary. You can borrow money from a bank to pay for a car, you have a mortgage on your house from a local bank, from save your paycheck in a bank, loan your savings to another person via a bank to earn interest, you can invest you savings in the stock market through your brokerage, pay your tennis fees to your friend using Paypal, buy a Sony PS5 by paying with your credit card. The second word is decentralize - which is a control concept, where decisions are made by peers via voting, instead of a central authority. Defi's enemy is centralized finance, which is today's traditional method of finance (which is through intermediaries). Centralized because all financial activity needs these two intermediaries 1) government for fiat currency & identification 2) financial intermediaries / institutions such as banks to store your money safely and stock brokerage to store your certificates safely. This is bad because it is 1) slow (think T+2) 2) expensive (think 2.5% credit card fee) 3) limits new financial services.
How Can Blockchain Help Defi?
The basic concept behind defi is having a way (say platform) to provide traditional centralized finance - but without a government and financial intermediaries. An implicit assumption that the government and financial intermediaries provide is trust. Trust that data entered is good. Won't be altered. Always accessible. Will be honored. So basically defi needs to get rid of the government and financial intermediaries - but still retain trust. Blockchain can provide this : a single source of data, public, and trusted. That is why most defi platforms are built on Ethereum - which is blockchain. What makes Ethereum good to replace centralized finance? Recall that the enemy of defi is centralized finance, which requires 1) government fiat currency and identification 2) financial intermediaries / institution. So how will we replace fiat currency, identification, and a financial intermediary / institution? Ethereum can, which has 1) ledger 2) smart contract 3) native currency / token called ETH 4) ERC-20 standard for people to create their own token (fungible ) on Etheruem . For identity, an Ethereum public address will serve as your psuedo-annonymous identity (psudeo-anonymous because all public addresses and transactions to/from that address is visible to the public, but the public won't know WHO is behind that public address). The Ethereum ledger will serve as the trusted bank ledger. ETH will serve as the currency, but now digital/crypto instead of fiat. And ETH is NOT backed a government.
Hype vs Reality of Defi : FOMO?
What are some of the motivations to participate in defi? 1) defi provides to you (as a consumer) a service that you can't get from today's centralized financial services 2) defi gives you (as an entrepreneur) a way to provide a service that tradtional centralized financial services can't provide 3) you (as a person on the sidelines) want to dabble in this hype due to FOMO 4) you (as an enterprise) want to create a buzz and want to dabble and hedge in defi - just in case it takes off. CNBC lists Mark Cuban dabbling in defi, so does that make it legit?
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