DeFi stands for Decentralized Finance. Right now, you probably use TradFi or traditional financial systems (AKA Centralized finance/CeFi or Legacy Finance) to do things with your money. Storing your funds in a checking account with a bank, using a card to access that money, and taking out loans are all services offered by TradFi banking institutions. DeFi is a new paradigm in managing money via internet protocols and giving people all over the world access to financial services.

DeFi uses Cryptocurrency and Blockchain technologies. The Blockchain keeps everything secure and makes sure the only person that can access your money is YOU. If you’ve never heard the word blockchain or you’re still learning more about it, then check out my upcoming piece: What is the Blockchain, and how the heck does it work?

To make it easy to understand the differences between DeFi and TradFi, let’s use some examples.

I have a friend in the US, Naomi, and she has a friend in Finland, Johan. Naomi is sending Johan money because he designed a cool graphic for her to use on her business logo. Using TradFi, Naomi would have to send money from her bank to his bank using an international transfer. Her bank charges a percentage of the amount sent as a fee to perform this transaction and tells her that the transfer will take 5 business days to go through. Naomi does it because she needs to send Johan money for the awesome work he did. She is sad that she had to pay the fee and that it takes so long, but she doesn’t know of another way to reliably send money across the world.

Enter DeFi. With DeFi, Naomi can use her Ethereum Cryptocurrency wallet to transfer as much money to Johan as she would like (the Ethereum blockchain uses Ether/ETH as its native currency), and it arrives in his wallet within minutes because it is all done over the internet. She doesn’t have to wait 5 days, she doesn’t have to rely on the banks because it’s all done with computer code, and they are both sure that the transaction was completed thanks to the consensus of the Ethereum Blockchain!

This is a huge improvement when it comes to transferring value from one person to another. Let’s look at another example of what DeFi can do.

Naomi wants to invest more money into her business to help it grow. She has a house, 100 shares in a major tech company, and 50 ETH, but she doesn’t want to sell any of those because she believes they will all continue to grow in value over time. She really wants to grow her business, so she decides to take out a loan and use her assets to secure it. She goes to her bank on a weekday during banking hours and waits in line to speak with a banker that can help her complete the paperwork. She fills out a loan application and uses her house as collateral. After waiting 3 business days she finally receives confirmation that her application was accepted with an APR of 9%, and the loan will be deposited into her checking account after 2 more business days. She wished she didn’t have to wait so long and go through so much hassle to get the loan, but she really wants to invest more in her business, and this is the only option.

Enter DeFi. With DeFi, Naomi can go to a lending protocol and deposit her ETH as collateral in the lending pool. With her ETH in the protocol, she earns an APR for as long as it’s held there. With her ETH deposited as collateral, she can also take out a loan. She chooses the amount she would like to borrow based on how much ETH she deposited (up to 65-75% of the value of her ETH usually) and confirms the loan. Within minutes, she has the loan amount deposited in her Crypto wallet. No waiting in line, scheduling a long lunch to get to the bank during business hours, or paperwork required.

Performing this process in DeFi is far easier and less time consuming than it is in TradFi. That’s why DeFi is quickly becoming used by people across the world. There is a much smaller barrier to entry than TradFi because all you need is an internet connection. DeFi has started to show that though TradFi is powerful, it has become too large, too deeply rooted within the nation-states (AKA countries) in which it is used, and very inefficient.

Now, this is not intended to disparage these systems, because they have all been integral in the growth of society and its ability to bring incredible innovations to the people of the world. The purpose here is to highlight why these systems have become less effective, and the need for a revolution that allows financial services to experience the exponential innovation that the internet has already brought to countless other industries.

TradFi is built on top of the central banks of the world. When a nation-state wants to issue its own currency to the people that live within its borders, they need a way to control the release and management of this money. So, many of them create a central bank to be responsible for all of this. That government and central bank then start to make rules and standards for how this money is to operate. For a long time, this worked well for most nation-states. They had their currency, governed it how they liked, chose what it can and can’t do, and most people who lived there never needed to do things that the banks had not yet made possible.

As the 20th century progressed, the world became much more accessible to the average person, and people were doing things that founding central bankers never dreamed would be possible. Then, the internet was born, which eventually lead to the breakthrough of digital scarcity (which is the ability for something to be 100% digital but also have provable scarcity with the blockchain i.e., cryptocurrencies).

Now, we have all this amazing technological innovation pushing society forward, but we still use TradFi services where banks fax paper copies of documents and must wait for people to be working in the office for a transfer to post to your account. There wasn’t a better system for a long time, but now there is.

This is why we need DeFi. Take Naomi from earlier: there are so many more amazing things that she can do with DeFi that make her current bank account look like a dusty old typewriter. We didn’t even scratch the surface with those 2 examples. This technology is revolutionizing how people access financial services. It’s a worldwide ecosystem that doesn’t exclude anyone, no matter how much money they have or if banking companies are present where they live in the world.

DeFi is changing how we approach finance, and we’ve only covered the basics here, but I hope you’ve started to understand what DeFi is and why it can change how the world uses money. Here’s to bringing global financial infrastructure into the 21st century!

DeFi stands for Decentralized Finance. Right now, you probably use TradFi or traditional financial systems (AKA Centralized finance/CeFi or Legacy Finance) to do things with your money. Storing your funds in a checking account with a bank, using a card to access that money, and taking out loans are all services offered by TradFi banking institutions. DeFi is a new paradigm in managing money via internet protocols and giving people all over the world access to financial services.

DeFi uses Cryptocurrency and Blockchain technologies. The Blockchain keeps everything secure and makes sure the only person that can access your money is YOU. If you’ve never heard the word blockchain or you’re still learning more about it, then check out my upcoming piece: What is the Blockchain, and how the heck does it work?

To make it easy to understand the differences between DeFi and TradFi, let’s use some examples.

I have a friend in the US, Naomi, and she has a friend in Finland, Johan. Naomi is sending Johan money because he designed a cool graphic for her to use on her business logo. Using TradFi, Naomi would have to send money from her bank to his bank using an international transfer. Her bank charges a percentage of the amount sent as a fee to perform this transaction and tells her that the transfer will take 5 business days to go through. Naomi does it because she needs to send Johan money for the awesome work he did. She is sad that she had to pay the fee and that it takes so long, but she doesn’t know of another way to reliably send money across the world.

Enter DeFi. With DeFi, Naomi can use her Ethereum Cryptocurrency wallet to transfer as much money to Johan as she would like (the Ethereum blockchain uses Ether/ETH as its native currency), and it arrives in his wallet within minutes because it is all done over the internet. She doesn’t have to wait 5 days, she doesn’t have to rely on the banks because it’s all done with computer code, and they are both sure that the transaction was completed thanks to the consensus of the Ethereum Blockchain!

This is a huge improvement when it comes to transferring value from one person to another. Let’s look at another example of what DeFi can do.

Naomi wants to invest more money into her business to help it grow. She has a house, 100 shares in a major tech company, and 50 ETH, but she doesn’t want to sell any of those because she believes they will all continue to grow in value over time. She really wants to grow her business, so she decides to take out a loan and use her assets to secure it. She goes to her bank on a weekday during banking hours and waits in line to speak with a banker that can help her complete the paperwork. She fills out a loan application and uses her house as collateral. After waiting 3 business days she finally receives confirmation that her application was accepted with an APR of 9%, and the loan will be deposited into her checking account after 2 more business days. She wished she didn’t have to wait so long and go through so much hassle to get the loan, but she really wants to invest more in her business, and this is the only option.

Enter DeFi. With DeFi, Naomi can go to a lending protocol and deposit her ETH as collateral in the lending pool. With her ETH in the protocol, she earns an APR for as long as it’s held there. With her ETH deposited as collateral, she can also take out a loan. She chooses the amount she would like to borrow based on how much ETH she deposited (up to 65-75% of the value of her ETH usually) and confirms the loan. Within minutes, she has the loan amount deposited in her Crypto wallet. No waiting in line, scheduling a long lunch to get to the bank during business hours, or paperwork required.

Performing this process in DeFi is far easier and less time consuming than it is in TradFi. That’s why DeFi is quickly becoming used by people across the world. There is a much smaller barrier to entry than TradFi because all you need is an internet connection. DeFi has started to show that though TradFi is powerful, it has become too large, too deeply rooted within the nation-states (AKA countries) in which it is used, and very inefficient.

Now, this is not intended to disparage these systems, because they have all been integral in the growth of society and its ability to bring incredible innovations to the people of the world. The purpose here is to highlight why these systems have become less effective, and the need for a revolution that allows financial services to experience the exponential innovation that the internet has already brought to countless other industries.

TradFi is built on top of the central banks of the world. When a nation-state wants to issue its own currency to the people that live within its borders, they need a way to control the release and management of this money. So, many of them create a central bank to be responsible for all of this. That government and central bank then start to make rules and standards for how this money is to operate. For a long time, this worked well for most nation-states. They had their currency, governed it how they liked, chose what it can and can’t do, and most people who lived there never needed to do things that the banks had not yet made possible.

As the 20th century progressed, the world became much more accessible to the average person, and people were doing things that founding central bankers never dreamed would be possible. Then, the internet was born, which eventually lead to the breakthrough of digital scarcity (which is the ability for something to be 100% digital but also have provable scarcity with the blockchain i.e., cryptocurrencies).

Now, we have all this amazing technological innovation pushing society forward, but we still use TradFi services where banks fax paper copies of documents and must wait for people to be working in the office for a transfer to post to your account. There wasn’t a better system for a long time, but now there is.

This is why we need DeFi. Take Naomi from earlier: there are so many more amazing things that she can do with DeFi that make her current bank account look like a dusty old typewriter. We didn’t even scratch the surface with those 2 examples. This technology is revolutionizing how people access financial services. It’s a worldwide ecosystem that doesn’t exclude anyone, no matter how much money they have or if banking companies are present where they live in the world.

DeFi is changing how we approach finance, and we’ve only covered the basics here, but I hope you’ve started to understand what DeFi is and why it can change how the world uses money. Here’s to bringing global financial infrastructure into the 21st century!