What the f*ck is DeFi?
DeFi (decentralized finance) is a confusing area of the cryptocurrency world, and for a good reason. There's not a lot of clear information out there, and it can feel like an exclusive club. Some people make money with DeFi, but many avoid it because it seems overly complicated. We are here to break these beliefs! DeFi is nothing but the purest form of financial products in the hands of people. It can be simple or complex, depending on what you want to do. The bottom line: DeFi puts you in control of your money and helps it grow.
Traditional Finance Banks are the most common financial institutions we use. They provide a variety of services, such as savings accounts and loans. We all use banks for things like saving money and getting loans. But are you aware of the potential drawbacks and limitations of using a bank? What if we told you there's another way to help you grow your money more effectively?
Three main things set traditional finance (TradFi) apart from DeFi: • Payments and clearance systems; • Accessibility; • Centralization and transparency;
1 - Payments and clearance systems Sending money internationally through traditional banks can be a frustrating experience. It often takes days to complete and comes with high fees due to the network of intermediaries involved. Each intermediary adds a layer of complexity and cost, slowing things down and driving up the price.
This is where crypto and DeFi come in. Cryptocurrencies, powered by blockchain technology like Solana, offer a faster and cheaper alternative. Transactions can be completed almost instantly and for a fraction of a penny, thanks to the efficient way blockchains process information.
But the benefits go beyond speed and cost. Traditional bank transfers often involve a maze of paperwork, compliance checks, and privacy concerns. DeFi removes these hurdles, allowing you to send money directly to anyone in the world, quickly and securely.
Imagine sending $1,000 to a friend in Australia. With a traditional bank, you'd face multiple fees and wait days for the transfer to arrive. With DeFi, the transfer would be processed in minutes, with a small fee compared to traditional bank charges.
2 - Accessibility Traditional financial systems can be a closed club, leaving many people out. This might be due to where you live, your financial situation, or even complex regulations. DeFi aims to change that. It's built on the idea that everyone with an internet connection should have access to financial services. No permission needed, just a phone or laptop and you're in.
Imagine millions of people around the world without even a basic savings account. DeFi has the potential to bridge this gap. Unlike traditional banks with lengthy verification processes, all you need for DeFi is a mobile phone and internet access. The World Bank estimates a large portion of the unbanked already have mobile phones, making DeFi a potential gateway to financial tools they wouldn't have access to otherwise.
It stands for a more inclusive financial system, one that's open to everyone, regardless of location, wealth, or background. It's a level playing field where everyone has a shot at participating.
3 - Centralization and transparency While traditional banks offer security and regulation, they also come with downsides. Even large banks can fail, as past events like the collapse of Lehman Brothers show. This centralization of power and lack of transparency can be risky. DeFi offers an alternative. Built on blockchain technology, DeFi applications are mostly open-source, meaning their code is publicly available for anyone to inspect. This allows for greater transparency and reduces the risk of manipulation by any single entity. DeFi protocols operate based on code, which can't be cheated and ensures all participants are treated fairly. This focus on openness and code-based operation makes DeFi a unique and potentially more secure option for some users.
Example: The perfect example is the FTX drama where they took costumer funds and they were used by a second company owned by Sam Bankman Fried, called Alameda Research to do the trading. The crazy thing is their employees didn’t even know about it so how would its users know. This is the risk of believing in centralized entities, we never know what to expect and everything can go wrong, literally.
Traditional banking systems can be frustrating. Many people are excluded from these systems, creating an uneven playing field. Decentralized finance (DeFi) aims to fix this. It's a movement built on making financial tools accessible to everyone, regardless of background or location. Unlike traditional finance, DeFi doesn't discriminate based on race, religion, age, or nationality.
So, to sum up before heading into new topics, DeFi isn't a single product or company. Instead, it's a whole ecosystem of financial tools that can replace traditional banks, insurance companies, and even stock markets. Think of it like a financial toolbox with interchangeable parts. It lets you use these tools together in different ways, opening up all sorts of possibilities.
