Your guide to DeFi aka OPEN finance

Chris Ray -

If you think back to my introduction to Crypto, which is found here: https://infosecforhumans.com/crypto-for-humans-or-anyone-in-tech/ - You will remember that crypto is attractive because it is decentralized, not controlled by a central bank or government.  This idea is responsible for launching other decentralized concepts, probably the largest is the decentralized finance space aka DeFi.  

What is DeFi?

Whats the big deal about DeFi? I have worked in financial institutions, large and small, I can attest that the financial products offered by these organizations are designed to benefit them and not you, the consumer of these loan and savings products.  Despite what the newest marketing slogan may say, they are looking out for #1.  

With Defi, you remove the bank or credit union.  They are replaced by a program (called a smart contract).  Smart contracts are just like any other application, but instead of running on a server somewhere in Amazon (AWS) or a corporate data center, the smart contract runs on top of a distributed set of servers (aka decentralized network).  

Why use DeFi?

So what happens when the driver (the Bank in this example) of products and services being developed and offered?  

You end up with a radically different experience from a traditional financial institution.  

  • Permissionless: Remember the last time you applied for a loan product (auto loan, mortgage, credit card, etc...)? Forms, identity verification, income verification, approvals, explanatory letters...none of that exist in DeFi. DeFi is a "permissionless" concept, you don't have a loan officer or institution acting as a gate keeper.
  • Auditing: Remember how I said the institution is replaced by a application call a smart contract? This smart contract's code is availible for audit and review, anyone can pick it apart and verify it will do what it claims to do. This level of transparency is impossible with a traditional institution.
  • Transparency: Transactions are completly auditable, on most DeFi apps. This level of transparency can be used to root out frauds and scams as well as select a succesful product. Did I mention that this level of auditibility is created because every transaction is publicly viewable? Try to get your bank to provide that level of transparency
  • WYSIWYG: The rules that the DeFi app runs on, or better yet...lives by, are determined when the smart contract is created. Once the smart contract hits the distributed network where it runs, it will follow those rules. No deviations will occur, unlike a few times I have seen banks and credit unions reverse course post-launch.
  • Interoperability: And the single biggest difference is the level of interoperability! Companies like Yearn.Finance take this interoperability approach to their products, which have been able to offer savings APY's as high as 100% (these rates are now long gone, but its still quite easy to find 20%+ APY). How this works is beyond the scope of this article, but I can cover this if (let me know?)

What can you do with DeFi apps?

Ahh good question!  Because DeFi is a replacement for traditional financial institutions, right now DeFi apps mimic what you find from a traditional bank.

  • Lending: Typically the bank lends you money. In DeFi, because the "bank" is the smart contract and the money is provided by other users, you can borrow money but you can also LEND money. This creates opportunities that banks simply can't compete with.
  • Globable access: Need to lend money to a friend or send money to a family member on the other side of the planet? Leveraging the globabl capabitlies of DeFi and smart contracts, this becomes instant and simple.
  • Insurance: Yes, insurance! While most insurance products offered in the DeFi space right now focus on protecting users from buggy code, there is atleast one project that aims to help farmers protect themselves form droughts.
  • Portfolio management AKA Aggregators: Unlike services from traditional banks, its very common to access and use various DeFi apps. For example, you might lend using App A, borrow from App A and App B and get insurance from App C. Instead of logging into each individually, calculating financial information then manually combining (or paying someone to do this) you can setup an aggregator to manage your DeFi assets.

Closing thoughts on DeFi

Defi presents an exciting yet challenging opportunity.  It takes a historically burden-laden industry and throws away all conventions.  This has created radically different ways for individuals to leverage their money in ways previously only availably to institutions or high net-worth investors.  

One thing is certain, its not too late to jump into the DeFi space.