What is DeFi?
DeFi is an abbreviation of the phrase decentralized finance which generally refers to the digital assets and financial smart contracts, protocols, and decentralized applications (DApps) built on Ethereum. In simpler terms, it’s financial software built on the blockchain that can be pieced together like Money Legos.
What is DeFi and who is it for?
To better understand DeFi, we should first take a look at how traditional finance came about. Although it sometimes feels like money has always been around, that’s simply not the case.
Humans originally bartered for the goods and services. But as human societies formed and developed, so did our economies. We invented currency to make exchanging things of value easier. Subsequently, currency helped usher in new innovations and higher levels of economic productivity. However, progress didn’t come without its cost.
Historically, central authorities such as governments have issued the currencies that underpin our economies. Central banks and institutions were expected to carefully manage and regulate the supply of currency in circulation. As the size and complexity of our economies grew, these central authorities gained more power as more people placed trust in them.
You trust your government to not print more money overnight. You trust your bank to safely store your money. And, when it comes to investing, you trust your assets to a financial adviser. By handing control of your money over to others, you hope to earn a profit. But the sad truth about our current financial system is that the power that comes along with this trust isn’t always rewarded.
We often have very little say in how corporations handle our investments, or even how our governments manage the economy. And in most cases, investors only receive a fraction of the returns generated from the risks taken by these central authorities.