Your All in One Guide to DeFi

Have you heard of the new finance and computer science course being taught at Berkeley with over 300 MBA and undergraduate students? What initially started out as an obscure theory or trend has made its way into college classrooms across the country. DeFi is in all parts of Gen Z life now, from NFTs to crypto to Bitcoin. So, what even is DeFi? DeFi or decentralized finance is a blanket term for a financial system that does not rely on financial intermediaries, including banks, insurance companies, credit unions, stock exchanges, etc. It is open-source, permission less, and transparent. The general goal of decentralized finance is to allow users to transfer, trade, invest, and do transactions using cryptocurrencies because of the accessibility and many benefits. Benefits include added security of your currency due to the elimination of bank robberies, risky loaners, etc., a low barrier of entry for anyone with internet access, higher interest rates for adding to a “lending pool”, trust less transactions, and quicker access to your currency. DeFi is essentially a peer-to-peer transaction idea that people will no longer need to trust financial institutions with their money. Everybody in the world who has internet access and can buy, trade, and lend money to one another without the need to use different country’s currencies. DeFi applications also do not need to trust you, for $10 debt you would need $20 collateral.

Because every transaction is transparent and accessible, there is very little information needed about the lender or the borrower to do either of these things. Smart contracts will ensure that whatever transaction agreed on will be carried out. Smart contracts are agreements that are directly written into the code of the transaction between the buyer and seller. The most popular exchanges use either a factory contract or an exchange contract. The factory contract will create a new exchange and register various token addresses to the exchange contacts address. An exchange contract holds a pool of one or more tokens that users can exchange. Tokens are a form of cryptocurrency that represents an asset or specific use on their blockchain. Regardless, smart contracts are completely transparent and can be viewed by anyone. These smart contract programs are called dapps (an app based on decentralized technology). Users can borrow and lend money through a dapp (one of the interoperable apps) called Compound that matches borrowers and lenders immediately so you can immediately borrow for something like groceries and pay it back with an adjusted interest rate based on supply and demand. Earning interest is considered a form of “yield farming”. Compound began giving out “Governance tokens” to encourage buying and lending, which is considered “liquidity mining”. Platforms like Maker are attempting to be a reserve bank and have people who hold MKR tokens vote on decisions like a Stability Fee.

While DeFi is all the rage amongst engineers especially, many prominent figures in the financial industry as well as the crypto industry are skeptical. The money is pouring into startups in DeFi with just an idea of a company to pitch. The heavy regulations that DeFi continues to run into poses an issue that will continue to be overlooked so long as the trend continues to properitate. So, while DeFi is the next big thing like crypto, how much of a risk are you really willing to take? This begs the question: will you buy into this unexplored market?

If you do choose to, keep an eye out for some of the upcoming companies that have made a splash in DeFi. Burst is the first DeFi-backed bank for Generation Z. Burst claims that users can get up to 250x more in savings as opposed to regular banks and can save 10% yearly by cutting out the middlemen and utilizing DeFi Protocols. Hate coding and heard about the NFT buzz? Bonfire is just the company that has created a no–code platform that incorporates a dashboard, CRM, and community engagement tools that are all powered by NFTs and social tokens. Even the agriculture industry is looking into DeFi: FarmRaise is a DeFi based company that helps farmers link farmer’s bank accounts to figure out what are the best ways to make the farm more profitable. They regularly monitor farm data to provide easy to implement ways to improve the farm. Whether it is a platform to simply teach how to use DeFi tools or a platform that is completely powered by DeFi, it has certainly made its mark on the internet, with celebrities engaging in NFTs and new hot companies popping up all around it.