What is DeFi?
Ethereum’s goal is to become the platform for the next web. Web 3.0 will be decentralized, and with underlying economies built into it, anybody anywhere will have access to finance. These DeFi projects are being built and rolled out on Ethereum.
Decentralized Finance (DeFi) could quite easily become Ethereum’s main industry. Imagine a global, open alternative to every financial service you use today: savings, loans, trading etcetera. One that is accessible to anyone in the world with a smartphone and Internet connection.
DeFi and Smart Contracts
That’s DeFi and it’s possible because of Ethereum’s smart contract architecture, which is a program built on the Ethereum blockchain that can self-execute when certain conditions are met.
They enable developers to build far more sophisticated programs than simply sending and receiving cryptocurrency. In fact the possibilities are so endless, nobody knows the exact vision possible with decentralized smart contracts.
A smart contract, or dApp, is built using decentralized technology, which means it’s run and generated by thousands of different computers on all corners of the globe.
The code of each dApp, and Ethereum, is open source for anyone to audit, and all transaction activity is also open for anyone to view. This alone is building a level of trust that is impossible with the legacy financiers.
While the openness may worry some people, who value their privacy, transactions are pseudonymous by default, and nobody knows exactly who an account belongs to.
Unlike the legacy financial world, nobody needs permission to participate, and nobody needs paermission to build anything on the blockchain.
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While DeFi is in its very early days, and we’ re nowhere near the possibilities of the new industry, the facilities are already being released.
Collateralized loans are a big part of the early DeFi space. Companies and even peer-to-peer loans are possible. Whether you get a loan from a company or a random person, as long as you have the collateral, you will get the loan.
There are companies paying interest on your cryptocurrencies, just for holding crypto on their platform. Very favourable interest as well, I might add. The interest varies but it’s not uncommon to receive a 10% return on your investment.
How can they afford to pay such a large amount of interest I hear you ask? They lend out the crypto to verified investors and make money themselves. They’re also much smaller than their legacy financial institutions with less overheads, and because it’s all coded into the blockchain, they have a much cheaper and secure system.
DeFi is one of the fastest growing sectors in crypto – data actually measured by how much ETH is locked in DeFi smart contracts, which is now over $600m. Not bad for a brand new industry.
What Next for DeFi?
Think of Ethereum as a bit like an amplifier for a full home surround sound system – it will be the infrastructure that amplifies everything, and Defi is its subwoofer. This system is going to grow.
In the coming years, every financial service that we use in today’s fiat system could be rebuilt for the crypto ecosystem. We’ve already seen industry sectors such as exchanges, borrowing, lending, custody, and derivatives built for crypto. This is just the beginning.
DeFi dApps rely heavily on collateral as a safeguard, today, but that will evolve as regulations are implemented, and this will introduce unsecured borrowing and lending into the DeFi space.
This will need a secure identity system, something only a blockchain can offer, and with it, users will build up a rating like today, and be given access to funds not just from their local bank, but pretty much anywhere in the world.
DeFi will evolve as DAOs evolve, too. Aragon is building something that could resemble a decentralized government, and much more. Anything can be coded into smart contracts, and with underlying finance locked into the program, the future of DeFi and dApps in general is impossible to quantify.
It is a really exciting time to be alive. Innovation is growing so much quicker, and Ethereum is going to disrupt and even give birth to many new industries. It’s early days not just in DeFi or even Ethereum, but the whole blockchain movement.
Legacy industries are taking note, and many are joining forces and building on Ethereum. I don’t know exactly what the future will look like, but I’m confident DeFi and Ethereum will play a large part of it.