If you own a cellphone there is a good chance the word DEFI has in some way shape or form crossed your newsfeed. If not, welcome to the world's most anticipated revolution that nobody expected.
Before plunging into the wonderland of monster apy rates ,that is DEFI ,there are a few quintessential primitives that we should address;
→DEFI is a compendium of two separate words & Subject matters, DEcentralized + FInance. →Decentralized Finance refers to products, in the form of very well designed smart contracts, deployed to a turing complete distributed ledger network. The leading blockchain networks powering DEFI are Ethereum & BinanceSmartChain. However, a multitude of other smart contract blockchains are slowly gaining traction (ex: Tron, Polkadot, Kusama, Avalanche, etc…)
→The Purpose of DEFI is to replace the outdated centralized systems of legacy financial infrastructure.
Now, more than ever, people are beginning to question the authoritarian regimes impeding on the quality of life & privacy of their populations. With each passing day, citizens of different countries around the world lose more & more trust in their governments. Losing trust in their government means losing trust in the monetary/fiscal regime underpinning their government’s currency; which in turn directly reflects itself as the inevitable collapse of that civilization. It should come as no surprise given that countries such as Nigeria, Venezuela, & Turkey, among others, serve as prime candidates of currency collapse.
DEFI is on a noble mission to displace the centralized financial systems with more equitable, efficient, transparent & decentralized ones (that also happen to be natively digital). *** It is this author's opinion that it is a short matter of time before DEFI will just be referred to as Finance. ***
In order to understand what exactly DEFI looks like & its potential impact; it is important to be aware of the 8* (+1) KEY categories that constitute modern financial system;
What are the Different categories of DEFI?
Lending / Borrowing
Pretty simple; You have 1 BTC. Rather than having it just lay there & appreciate at price — you give it to somebody to use & in return earn a premium for doing so. The inverse is true for Borrowers.Trading
How can finance exist without trade? It can’t. Trading presents one of the most competitive segments of finance due to its earning potential.Derivatives
Complex & sometimes downright exotic instruments for trading, hedging & investing.Options
One of, if not the, most popular derivative that is commonly used to manage risk in a portfolio. (Allows people the right to buy without obligation to do so).Payments
A lesser talked about the financial category in the public domain, payments are the lifeblood to any economic venture.Wallets
It's great to own crypto… but where are you gonna store it?Asset Management
Why have Goldman Sachs hold your assets earning maybe 15% per year minus inflation & operational fees when you can have an automated, transparent system that no longer forces you to trust (just verify).Insurance
Some hate it. Some Love it. Others are indifferent. Regardless of where you fall on this spectrum, it is impossible to deny the importance of a >$100 Billion industry.(8*+1) Oracles
The glue that binds the blockchain/crypto economy with the data from the real world. Oracles a fundamental element to ALL crypto & finance, however, they can be attributed to DEFI.
So now comes the question of questions for DEFI; why decentralize something that seems to be working when it is centralized?
If you may not already know, over the past 10+ years, institutions worldwide have been getting fined for violating personal privacy, manipulating information & downright fraud. Centralization means rent-seeking & having your privacy at the whim of a self-interested counterparty. Centralization imposes biases that exclude global participation due to delicate social nuances such as political alignments.
On the other hand, we have Decentralized systems. Decentralized systems distribute power/ownership & impose accountability.
Decentralization is the enemy of corruption.
(— Andrey Didovskiy)
But enough with these formalities; DEFI only matters to 99% of the world for 1 reason — gains. Moonshot, leverage long 100x, no stops, rekt, when lambos.
When DEFI slammed onto the “mainstream” scene in the summer of 2020, projects were coming out with 1,000%+ APY products 0.0. Just to put that in perspective, investing $10,000 into DEFI meant a $100,000 payout. This, obviously was not remotely possible, let alone sustainable. Soon after the market returned to its mean & then went absolutely ballistic, growing over 12x (in effect voiding the so-called “rationale” logic of sustainability).
These giga-chad return stories tickles retail interest & then everybody wants to get involved. Only one problem. How…
Participating in DEFI today is not necessarily the simplest of user experiences. Many people want to try out some cool new protocol but before long, get lost in their metamask seed phrases & just give up. Heck, some don't even make it that far — there are so many options that it might get overwhelming; after all, what chain do I even do DEFI on?
As mentioned at the start of this writing, DEFI, as it stands, is built primarily on Ethereum & BSC (BinanceSmartChain) {Both of these chains use the same deployment environment: the EVM[Ethereum Virtual Machine] Getting caught up in this is a waste of your precious brainpower — while using any DEFI product implies high risk — not using DEFI could all the like imply the inverse.
Just to start, dip your toes in the water by just looking at the leaders in the space, learning about them will lead you down the rabbit hole & to new opportunities;
Here are 5 of the most reputable, user-friendly DEFI products (these are all built on ethereum).
- Compound ( $COMP ) → profile → Site || lend/borrow
- AAVE ( $AAVE ) → profile → Site || lend/borrow
- UniSwap ( $UNI ) → profile → Site|| Exchange
- Maker ( $MKR ) → profile → Site || Governance
- Balancer ( $BAL ) → profile → Site || Exchange
Happy Hunting 🍾
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IMPORTANT NOTEs
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Media has muddied the public’s perspective & understanding of what DEFI is. Just to clarify a few things;
1) SHIBA INU is not DEFI.
2) DOGE is not DEFI.
3) If you choose to participate in DEFI, always be prepared for a RugPull.
4) Bitcoin is DEFI (change my mind 🙃)
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