Who is DeFi For anyways?
Throughout its history, traditional finance (“TradFi”) has dictated the financial landscape and influenced the way in which funds are utilized, circulated, and monitored. Whether it be a retail, investment, or commercial bank, or even an upcoming Fintech - tradfi has a monopoly over every area of modern finance.
Thousands across the globe remain unbanked, without access to traditional financial products. The permissionless ecosystem of decentralized finance enables the unbanked to become ‘banked’, as financial accessibility remains at the core of DeFi.
As DeFi continues to rise in popularity and various innovative, or perhaps quirky, use cases begin to circulate, many new to the cryptocurrency sphere may be unsure of where to start when it comes to DeFi. So, if you’ve ever wondered - What is the point of DeFi? - then we’re here to help.
What is DeFi?
DeFi (or decentralized finance) is an emerging financial technology that is founded upon secure distributed ledgers - comparable to those utilized by cryptocurrencies. Acting as a sibling of cryptocurrency, DeFi facilitates transactions made with cryptocurrency and hosts its utilization, as well as borrowing from the technology that founded it.
Essentially, DeFi relies on a system built without the external control of regulatory bodies or banks - thus granting autonomy to its users. Utilizing a self-custodied “wallet”, each user of a DeFi platform can store their own funds and seamlessly transact through a secure and permissionless system. All that is required is an internet connection to connect their wallets to the live state of the blockchain. Unlike TradFi, DeFi promotes a culture of trust and independence, therefore meaning that no intermediary or third party is required to facilitate transactions, nor monitor activity or impose regulatory sanctions.
In order for DeFi to ‘function’ per say, it has to work in tandem with smart contract and dApp (”decentralized application”) technology. The notion of “smart contracts” essentially refers to the technology pioneered by Ethereum and Solana, whereby computerized programmes are predetermined to automatically execute under specific conditions to solidify an agreement with an informed outcome. In other words, smart contracts enable “programmable money” that can follow predetermined actions based on specific conditions, without the risk of third party intervention. Additionally, dApps are collections of smart contracts that offer a diverse pool of utilities to their users. Harnessing the power of the two solidifies the trio as one of the most powerful multi asset financial systems present in the current financial world.
Unlike other elements of blockchain technology, DeFi has no sole founder. Instead it is an open-source amalgamation of blockchain technology that has been widely contributed to over a period of several years - with many of these technologies since being usurped by more powerful ecosystems. However, the first recorded incidence of DeFi is accredited to Rune Christensens’ MakerDAO, where asset holding and purchasing was facilitated.
However, since the rise of Ethereum as a crypto superpower, the role of DeFi has become synonymous with the cryptocurrency sphere. As the accessibility to DeFi project development on the Ethereum blockchain became commonplace, this has ultimately led to the development of OpenSea andUniswap, amongst many other protocols.
TradFi VS DeFi
As mentioned previously, TradFi is built upon centralized foundations, whereby the corporations and banking institutions seek to generate profit off their users as they transact and deposit funds. Third parties intervene at most stages, whether this be to facilitate the movement of funds, or charging fees for using their service. This centralized collaboration between TradFi and third parties can increase expense, limit individual control, and complicate various financial processes.
For example, say you purchase an item using a credit card. The charge is then moved from the merchant to the acquiring bank, which then exports the card details to a credit card network. This network then clears the charge and requests a payment from your bank, which is subsequently approved, before the charge is bypassed through the acquiring bank and back to the merchant. This overly complex process means that each entity receives a payment for its services, as merchants are generally charged for the utilization of card payments.
As well as this, a majority of other TradFi products require payment, whether this be a loan or international card usage - thus emphasizing the nature of the centralized system that has been cultivated.
However, DeFi transgresses against these typicalities through the elimination of intermediaries and third parties through the provision of technology that allows any party involved in the payment chain to partake in a peer-to-peer (P2P) system. By eliminating the necessity of so many third parties by using smart contracts, increased savings and efficiency is possible throughout the annalogous process.
With every transaction verified and consolidated on an unchangeable blockchain, DeFi facilitates trading regardless of where you’re located - without the expense or time element of TradFi.
In a mission to eliminate financial models developed for a centralized system, DeFi promotes accessibility, regardless of where or who you are. The distributed database in which it is built upon is accessible and transparent, whilst retaining pseudo-anonymity. All financial activity is permanently imprinted onto the respective blockchain and marked by a wallet address, thus removing the need for extensive KYC or divulgence of personal information.
Ultimately, DeFi is reforming the current system through the provision of autonomy and transparency, whilst TradFi is remaining static in its current structure.
Where Is DeFi Headed?
Despite all of its prowess, DeFi is still in its infant stages of development. Without regulation or a clear, unanimously agreed upon future - the future of DeFi is is difficult to ascertain. The throngs of visionaries and creative minds pouring into the industry spell hope for future development and signal a future where DeFi can truly resolve its intended use cases.
Fortunately, as DeFi draws closer to regulation and as more individuals and institutions move closer towards adoption - DeFi has the potential to truly demonstrate its capabilities against tradfi and position itself as a worthy alternative to the financial system we currently know.
Here at Jet Protocol, we strive to bridge the worlds of DeFi and TradFi, mirroring traditional financial products into a permissionless and interoperable system. Aiming to reflect the true potential of DeFi and map out the future trajectory of modern finance - Jet Protocol is geared towards the innovation of DeFi.