Crypto Explained: What is DeFi?

If you’re a crypto fan, you’ve probably been hearing a lot about DeFi for the past year now. 

It’s understandable. DeFi was relatively unknown for years, and then BOOM! It became mainstream in 2020. Data shows that the total amount of money locked in DeFi is now $76.7 billion. Just a year ago, that number was just $900 million. If that’s not growth, then what is? 🤯🤯 

With all the hype about DeFi, we decided to do a deep dive into what it is. Don’t worry, this won’t be some boring speech about money and numbers. As always, we’ve got the Quidax special – a mixture of information and sweet old vibes. 🙃🙃 So, grab a chair, and let’s talk about DeFi. 

DeFi – What on Earth is it? 

As you can probably guess, DeFi is a short-form word. It’s actually short for decentralized finance. 

Without going too deep, DeFi is a system that offers financial services without middlemen. 

Think of it like this….

Anything money-related requires middlemen. If you want to send money, you’ve got to go through a bank or a payment service. If you want to pay for a cup of coffee with your debit card, VISA or MasterCard makes it happen. 

These third parties basically control the transaction. Think about the last time your card got declined or a transfer wouldn’t go through. It was frustrating, right? We know – we’ve all been there 😩😩. Well, that was a problem with your payment service. Third-party services control your transaction and can record your information. They also take their share out of the total transaction value.

The good thing is that…

With DeFi, you get to cut these middlemen out. DeFi uses blockchain technology to bring two parties in a transaction together. There’s no one behind the curtain pulling strings or getting a percentage of your money. Everything is open and transparent. 

Why DeFi? Because Traditional Finance is Losing its Spark

For the longest time, we’ve all been used to the same financial structure – banks, insurance companies, investment firms, and more. Well, instead of using the same systems that have been in place for generations, DeFi is where the cool kids are at. Gang, gang!  😎😎  

Traditional finance has several disadvantages:

– It can be slow and costly. Sending money to someone outside the country can take hours – if not days – using a bank. You’ll also need to make currency conversions using the bank’s rates, which are much lower. 

– Then, there’s the issue of hacks and security breaches. Most financial institutions store their data in a single place. If hackers can successfully break through this data storage location, all customers’ information is out there for the world to see. 

Think of this like putting all your eggs in one basket. If your money is with a bank and they decide to raise fees, they make a terrible investment or go bankrupt, your money’s gone! With DeFi, your money is stored on decentralized networks that are hack-resistant and safe.  

– There’s also the problem of access. To open a bank account or an investment account today, you need to provide one document after another – utility bills, employment proof, identification papers, proof of residence, the list goes on 😅😅.  

Without these documents, access to financial services is almost impossible to get. With DeFi, however, you don’t need to scramble to get identification or proof. All you need is access to the internet, and you’re ready to roll 🚀🚀.

Use of the Ethereum Blockchain 

Today, most DeFi applications are built on the Ethereum blockchain. While it is smaller than the Bitcoin blockchain, Ethereum is unique because it supports smart contracts. Basically, smart contracts are programmed to carry out certain actions once certain conditions are met. 

Say you want to send money to someone, but only when the exchange rate hits ₦450 to $1. You can set a smart contract to do that and go about your day as usual. When your exchange rate target is met, the smart contract handles the transfer. 

Support for smart contracts is what makes the Ethereum blockchain so valuable for DeFi applications. It’s a match made in crypto heaven

Types of DeFi Applications

  • Lending: With DeFi like AAVE, borrowers can access funds much quicker, and they don’t have to go through long credit background checks. In general, DeFi lending services make borrowing faster, cheaper, and open to more people. 
  • Stablecoins: Stablecoins (like USDT) are cryptocurrencies with values tied to fiat currencies. They can easily be transferred, and you can convert your cryptocurrencies to stablecoins when the market goes down and you need to run for the hills.
  • Insurance: DeFi can also help people insure their assets on the blockchain. By getting rid of middlemen and sharing risks, insurance will become much cheaper for you.  
  • Decentralized exchanges (DEXs): DEXs allow you to trade and send cryptocurrencies without the need for a central authority. They don’t have much maintenance work, so DEXs charge lower trading fees.

Benefits of DeFi

  • Quick, cheaper transfers since you don’t have to rely on third parties
  • Flexibility, thanks to smart contracts 
  • DeFi is open to anyone. It doesn’t matter where you are or if you have documents. 

Possible Issues With DeFi 

  • DeFi is still new, so many people don’t trust it
  • Smart contracts can have flaws, so they’re not 100% safe

The State of DeFi

Currently, DeFi is the best thing since sliced bread for most crypto fans. It has grown so much over the past year, and everyone is excited about its future.   

Beyond the security issues, DeFi is facing the same challenge that crypto had when it first began – not many people know much about it. Now, you can count yourself within that group. Doesn’t it feel good? 

Quidaxhttp://www.quidax.com
Quidax is an African founded cryptocurrency exchange that makes it easy for anyone to access DeFi and CeFi Our aim is to educate you about cryptocurrency. It should not be considered as financial advice. We recommend conducting your own research before deciding to buy, sell or hold any cryptocurrency.