Believe it or not, cryptocurrency is quietly encroaching upon conventional finance territory. And the decentralized finance (DeFi) movement has been by far the most impactful trend within the crypto and blockchain ecosystem, says DeFi dad.
But what exactly is DeFi? In simple terms, it may be called a subsection of finance related and money applications built on ethereum, the second largest cryptocurrency platform by market capitalization, after Bitcoin.
But if you are looking for a more comprehensive definition, here’s one from DeFi dad: “It’s a new peer-to-peer decentralized censorship resistance finance system enabling trustless activities associated with legacy banking leverage debt credit capital markets money store value investments and more.”
To cut a long story short is that one is able to build DeFi applications that are specifically trustless, which means that one can use the application and not depend upon trusting anyone.
“They are peer-to-peer, they are decentralized, ideally some of these applications are already decentralized and are controlled by a decentralized autonomous organization or a
DAO,” DeFi dad said in a recent explainer video uploaded on YouTube.
According to him, the DeFi network is decentralised and so it’s flourishing. “It means that I can store my wealth on the blockchain and I can have an assurance that it continues to live there, but I can also be assured that I can end up sending that to someone else. And I’m able to do that thanks to the miners that uphold the network, also because of the code that’s been developed by core developers,” he said.
The DeFi dad claims there are about 30 really popular DeFi applications on ethereum and the total value locked in those smart contracts is a whopping two and a half billion US dollars.
“If you go back even a year ago it was less than half a billion. So, there’s a 5x increase year-on-year and then if you go all the way back to 2017 and the start of 2018, I mean it was all very negligible at that time like you’re talking about less than 100 million in terms of value,” he explained.
Though DeFi apps give users the opportunity to earn money without having to trade, DeFi dad says, trading is still a part of it. “You can trade with margin, you can do just market orders or market swaps… there are futures… there’s all sorts of things. You even have options and derivatives, but what’s more interesting with DeFi is it gives people the ability in many cases to let their assets do the work as well as provide liquidity that often then earns me interest.”
The expert explained: “It can earn me market maker fees and sometimes what I am going to generalize as pooled rewards so that could be a governance token that powers a DeFi protocol, which has been set aside to incentivize folks to participate in that protocol. So the synthetics protocol has all sorts of powerful trading applications and and when you participate in some of those you can potentially earn the SNX token.”
On what qualifies as DeFi and what not, he said that he doesn’t consider an app as a DeFi if it’s compromising on the principles that define ethereum and bitcoin “as these decentralized censorship-resistant networks allow people to transact and exchange value with one another”.
“It’s in the name—decentralized finance.” Therefore, said DeFi dad, it should relate back to some construct or mechanism that that we commonly associate with finance and that in this case might be something like trading or lending or you know capital markets or I put down a really specific example of like an ETF.
“When I use a defi application, the first step is connecting my wallet. If i don’t have to connect my wallet, if I have to sign up let’s say with like an email and give up any sort of personal information and then have to deposit assets and allow someone else to have custody and control of those that is not DeFi. DeFi is again simply using my ethereum wallet,” he said.