Decentralized Finance (DeFi) is the term that today is used to describe the movement that leverages decentralized networks to transform the traditional and legacy financial system into trustless and transparent protocols that runs completely without intermediaries. That is at least what I think of when I get the question ”What is DeFi?”. The truth is, that many people, at all ages, that works in fintech have not even heard about DeFi. And also, if you ask something working at Fintechs such as Izettle, Klarna, or Square, you might get the answer that they are the decentralized alternative to the traditional finace. But if you instead ask someone in crypto, you will get the answer that what they are doing is the true meaning of DeFi.
Fintech DeFi versus Crypto DeFi
So what should we believe in? Well, it is true that ”new” fintechs or early stage banks, such as Klarna or IZettle are more decentralized than for example VISA or Mastercard. However, even though I think these companies are great, in the end, they are highly centralised companies and no one can say anything about that, because it is just the reality.
In this blog, we will instead focus on the ”Crypto DeFi” – which can be understood as ’logic running on top of blockchains’, called ’smart contracts’ that are not owned by a single entity. By now, everyone have heard about bitcoin, and that there is no known founder/creator of Bitcoin, and that it is built to be a decentralised money transfer protocol. Now think of the next level of this, where we try to build for example the logic of a lending platform, automated in code that no one single entity can control. It is code running on the internet and all the rules are known and open.
If a Fintech would be a contract
If we think of Zopa, the Peer-2-peer lending platform, where you can lend money to someone who wants to borrow money and vice versa with Zopa being the middle man. Now, to really understand DeFi, think of someone creating all the logic in Zopa, puts it in Smart Contracts running on top of a blockchain, releasing the code and sets it free without owning it him or herself. The code runs on the blockchain and if someone have money to lend out, he/she can put that into a contract that seeks someone who wants to borrow the money. Inside of that contract, there are certain criteria’s that needs to be met in order for the borrower to borrow the money. Exactly like in the case of Zopa, however here you change Zopa to a smart contract and ones the parameters and criteria’s are correct, the borrower will successfully borrow money from the lender.
One example of a company that have been working on such protocol over the last years and that has grown quite popular over the recent months is Compound. So what is Compound? Well they describe themselves as an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications. If you want to take a look on their webpage, you find it at compune.finance
Another excellent place to find more information about DeFi is in Ivan on Techs Blockchain Academy where they have blogs and courses on DeFi. You find it here
So, we can summarise DeFi to think of it as the Movement that is trying to rebuild every product that exists in the traditional and legacy financial systems into smart contracts on top of blockchains. If you want to look around on different projects, I recommend you to take a look on DeFiPrime.com