Yep, another crypto term to demystify! Emerging technologies have a lot of lingo to learn but fear not dear reader, the Tampa Bay DAO will once again be your sherpa along this latest tech-term path!
“DeFi” stands for “Decentralized Finance”. It’s an umbrella term to describe a way of conducting financial transactions that aren’t dependent on a centralized agency, like a bank, to facilitate the transaction. It runs on a decentralized network of computers rather than a single server. “DeFi” describes a host of trustless and transparent protocols, based on crypto technology, that allows for direct, peer-to-peer transactions in place of third-party-mediated transactions.
The prominent technologies involved in DeFi are blockchains and smart contracts. Blockchains are an online, unchangeable, digital ledger. By their nature, blockchains are highly secured, transparent, decentralized, and distributed which makes it difficult for any individual(s) to hack or take full control over them. Smart contracts are programs that sit above the blockchain that follow a specific set of instructions. What makes a smart contract secure is that it cannot operate outside of the parameters given, which reduces any potential errors. Since it’s automated, there is no need to rely on human intervention, which is prone to mistakes and errors. That’s what takes a third-party, like a bank, out of the picture. Smart contracts are stored and executed on the blockchain, making it trustless and secure.
Ethereum is the most widely used blockchain for DeFi smart contracts, but there are others like Cardano, EOS, and Tron. The smart contract makes the transaction happen and the blockchain it’s housed in keeps the transaction secure and transparent.
How Can DeFi Help Me?
It’s all about control. With traditional, centralized financial systems, you’re in the hands of a third party, like a bank, to handle the transaction for you. Using De-Fi, you conduct the transaction directly with the other party. There’s no third-party intervention to get in the way or charge multiple fees.
Additionally, all the protocols underlying De-Fi are open source. That means that developers are free to create new products which opens the door to fast innovation and new technologies to make financial transactions easier and can lead to new applications of De-Fi technology.
Most importantly, unlike banks and other centralized financial institutions, DeFi doesn’t dictate who can and can’t participate in financial transactions. Anyone can participate without having to live up to whatever predetermined standards a bank might have. It’s not just for the 1-percenters!
How to Learn More About DeFi?
Google will give you the usual gazillion hits if you do a search on “DeFi” so, to save you a few years of reading time, here are three articles with helpful information to get you more grounded with DeFi:
Firstly, check out the Tampa Bay DAO FAQ page where we talk about DeFi and a number of other relevant terms.
“DeFi Beyond the Hype” is a comprehensive and very read-able PDF that will walk you through the fundamentals of decentralized finance and present a balanced comparison of it to traditional financial transactions.
Due to its typically high rate of return, lending money through DeFi is an attractive prospect, but there are risks that you need to be aware of. “DeFi Lending: 3 Major Risks to Know” outlines them for you.
“Code is Law? Smart Contracts Explained” is a whiteboard-animated video giving a good explanation of smart contracts.
What’s the Future of DeFi?
Since DeFi is an emerging technology, keep an eye on its development through blog posts here at the DAO. You can best be sure that banks and governments will be weighing in as DeFi becomes more adopted. DeFi has the potential to be a major disruption to the traditional, centralized banking system which could be great for us and not-so-great for them. Specifically, you can expect there to be discussions on regulating DeFi, applying tax laws to it, and setting up arbitration in case a DeFi transaction goes badly.
You can also expect to see some quality of life changes in the user interfaces for various De-Fi applications. Initially, De-Fi was coded for people well versed in blockchain technology. As De-Fi becomes more widespread, the general user experience will see improvement.
While DeFi is currently being applied to lending, borrowing, and purchasing, its technology can potentially be applied to a host of other things like crowd-funding, ride-sharing, apartment rentals, and charitable donations. These are all things that currently require a financial intermediary. DeFi could change all that, so watch out for its expansion beyond the realm of lending, borrowing, and buying.
About Tampa Bay DAO
The mission of Tampa Bay DAO (TBD) is to steward community members into ‘Free Agency’ through the use of Web3 & Localist tools in a way that is light hearted, collaborative, and compounding in nature.
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