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DeFi 101

A beginner’s guide to Decentralised Finance.

If you haven’t been living under a rock for the past 2 decades are so, chances are you have used or at least heard of Torrents. When Bram Cohen and Ashwin Navin first started the peer-to-peer file-sharing network called BitTorrent, they probably had little idea that they were ushering the world into a new era of decentralized platforms. A decade later, in 2009, Satoshi Nakamoto invented the world’s first cryptocurrency, Bitcoin. Based on a peer-to-peer decentralized system called Blockchain, Bitcoin enabled users to send and receive money instantly around the world, without the need of any governing authority. Today, with a market cap of about $657 billion, Bitcoin is the holy grail of crypto-currencies.

About 5 years after the first bitcoin was mined, 18-year-old Vitalik Buterin came up with the Ethereum blockchain, which built on Satoshi’s legacy and extended the scope of Blockchain into Decentralised Applications or dApps on the Ethereum platform, something which Satoshi had originally set out to do. The main purpose of decentralized applications, in the words of Buterin, is “reducing costs, removing points of failure, preventing censorship and ensuring transparency and trust between all the parties involved in the transaction.”

That’s okay. But What is DeFi?

Simply put, Decentralised Finance is a variety of decentralized applications (or dApps) which are built on any blockchain technology, for instance, Ethereum.

To think of it in practicality, imagine the simplest of contracts. You want to lend your friend Elon $1000 and he promises to pay you back $1100 after a year, you could sign a digital agreement with him stating the terms, which would, in turn, be verified and 'co-signed' by all the users of the blockchain. Terms of this agreement would be unchangeable, even by you, and would automatically execute at the end of the 1 year period. If there’s no disagreement, you and Elon would be able to execute this agreement efficiently, without the need for any lawyer or external arbitration sitting at your homes.

Another booming application of such dApps are NFTs or Non Fungible Tokens.

Non Fungible Tokens are objects with unique properties like works of art. Let's take another example to illustrate this. Your friend Rihanna is a huge Pokemon fan and wants to buy the extremely rare Pikachu digital collectible card from you for a million dollars (Rihanna is rich 😃), you could execute a dApp which would securely give you 1 million USDG with the instant exchange of ownership rights of your beloved Pikachu Card. In return, Rihanna will get the assurance that she owns the only Pikachu Card in the world and the incorruptible proof that she bought it from you for 1 million USDG. All of this would execute instantaneously with the help of a dApp.

Why Decentralised?

The current financial systems are marred with slow approval processes, transaction times, fraudulence, and high fees. To top that, there are geographical boundaries and restrictions in transferring funds. Decentralized applications greatly reduce transaction costs and times by eliminating intermediaries and create an incorruptible global network, based on community-based P2P. dApps are also easier to use and execute than traditional financial processes. The codes that handle these dApps are open-source and hence open to inspection and scrutiny making them even more secure.

What lies ahead for DeFi?

To sum up, DeFi is the collective term for financial products and services that can be accessed by anyone, without the need of a central governing authority. The open-source code lets developers build on to existing applications making it a highly collaborative, growing, and secure space.

There has been obvious skepticism revolving around DeFi from the people who stand to lose the most, yep, you guessed it, traditional Financial Institutions like Banks and Goverments.

But despite the skepticism, DeFi has been touted as the next big thing by many thought leaders in the FinTech space. The DeFi market has grown exponentially to almost $100 Bn in the past 1 year and is set to grow further after the initial prototypes of the DeFi models start showing success. The possibilities are endless and Decentralised finance has caught the attention of investors and entrepreneurs worldwide. Even Facebook founder Mark Zuckerberg is working on a blockchain-based payment system which is likely to delve into dApps eventually. It's only a matter of time when DeFi becomes mainstream and begins to compete with traditional finance as we know it.

What do you think would be the future of Decentralised Finance? Tell us in the comments below :D



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