Intro to DeFi: What is Decentralised Finance?

12 July 2021

What is DeFi?

The DeFi industry seeks to make financial services cheaper and available to everyone. All you need to access DeFi services is a smartphone with an internet connection. Services include borrowing and lending, insurance, investments and more.

Long term, the goal is to reduce the number of intermediaries and middlemen that force themselves between buyers and sellers for profit.

Every industry has intermediaries that market themselves as a necessary service. But most could be replaced by blockchain-based decentralised apps, known as Dapps. Decentralised apps let you and I interact with the DeFi economy. They reduce the need for lawyers and other rubber stampers to sign off on legal contracts. Instead, Dapps use smart contracts.

Smart contracts work similarly to the contracts we use now. But they automatically execute when parties meet predetermined criteria. Dapps can use contract templates that lawyers preapprove to ensure user safety. In the event one or both parties fail to hold up their end of the deal, the dispute can be settled in court. The key difference is that with Dapps, you don't need to pay someone to verify your contract or help you dispute it. Programs written in code carry out the process, which is far cheaper.

For example, Dapps can link renters with property owners and supply a legal template for rental agreements. Once the renter and landlord agree on terms, they use the template and sign the contract. Should either party break the terms they can settle the dispute through mediation or court. There's no need to pay large sums of money to lettings agents for filling out legal templates on your behalf. The lettings industry is the tip of the iceberg. Every industry could cut out intermediaries by adopting Dapps.

How is DeFi different from our current system?

The key difference is how businesses store and share data.

Current banking systems rely on centralised storage systems. This means they store data in one location and send it to other locations when necessary. This system relies on a global network of intermediaries sharing data – not the most cost-efficient solution.

DeFi could render this entire structure obsolete. Here’s how:

Dapps in the DeFi economy don’t rely on a single person or group. This means there’s no central authority guarding all the data. Instead, the data is securely stored on a blockchain. All data stored on a blockchain is spread out on a global network of nodes. Sharing data is far easier this way. Blockchains are transparent, and the data is quickly verifiable by anyone.

As Dapps operate on a blockchain, they are accessible everywhere. They aren't held back by the limitations of a centralised database or system. No individual or group has control over all our data. 

Why should we support Dapp development when our current system works?

Due to the massive regulatory requirements, few new banks ever reach the mainstream. This creates a closed economy. A handful of corporations enjoy a monopoly over the global banking system.

For the average Joe, it’s much easier to shut up and pay the big bank’s fees than it is to start a new bank. Competing with the current financial behemoths seems naive or just plain silly.

But using Dapps, anyone can offer the services banks carry out. You can lend out money and earn interest. You can borrow money, provided you have adequate collateral. There’s nobody guarding the gates or demanding you fill out enormous forms or wait for background checks to come back.

And best of all, it's all automated through code. There's no string of intermediaries leeching on hardworking people and businesses. Dapps also allow anybody to send money to anybody on earth for practically nothing. Conversely, current banks charge an average of seven percent in international remittance fees. For what exactly? Carrying out a process that Dapp developers have proved need not cost more than one or two percent at most. And we only have the first generation of Dapps. Imagine what the fifth or sixth generation will be capable of. 

Dapps are censorship-resistant, making them pivotal for functioning democracies.

Censorship isn’t a glaring problem in most developed nations.

But it's a big problem in other parts of the world. The Chinese government's crypto ban and democracy crackdown in Hong Kong highlights the scale of the problem. Dapps and crypto are vital to stop governments from stifling dissent through financial control.  

There are, of course, one or two drawbacks to implementing Dapps.

The programs and systems are susceptible to hacking attacks. Although, that is also true of our current banking system. But it’s more likely that a malicious group could hack a Dapp in its start-up phase than any investment bank.

Also, developers currently keep master keys to shut down or disable their Dapps. This is fine for now but could lead to awkward questions down the road. For example, how can a Dapp be truly decentralised if a person or group can shut it down or change its workings at any time?

There are loads of new and exciting Dapps already available and used worldwide.

The Uniswap protocol is a perfect example of how Dapps can already benefit us.

Uniswap lets users exchange the crypto in their wallet for other cryptos without using an exchange. This makes trading in crypto far easier for beginners. Users can also add their crypto to a pool in exchange for fees, called pooling. Doing so gives greater liquidity to the Uniswap Dapp, helping it work faster.

Dapps like Aave and Liquity already make decentralised lending a reality.

Decentralised lending is a great way for crypto holders to make money from their holdings. Decentralised exchanges, or DEXs, let users lend out their crypto holdings in exchange for interest. DEXs usually ask for collateral in crypto rather than a credit check or banking history.   

Register for the prototype

The next step on our roadmap is to ask for your help. We want to hear from you what works and what does not, which features are more important to you and which ones are lacking. In short, we need your guidance.

To facilitate this, we are creating a beta of our platform and are looking for a thousand pioneers to put it through its paces. We will expect a lot of feedback and suggestions from these pioneers over the next two to three months. However, these pioneers are not volunteers, when we launch each pioneer will have bestowed upon them 10,000 edifyqs.

If you see yourself as a pioneer, register for the prototype and explore the future.

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