In your friendly financial neighborhood, there’s a new kid on the block(chain): DeFi.
Decentralized Finance (or DeFi) is the upside-down version of today’s centralized financial system where entities like banks, credit unions, and brokers handle our money for us. You know the drill: go to the bank to get a loan and, after putting you through a mountain of paperwork and a colonoscopy, it pulls cash from its other customers’ accounts to lend to you. While you pay interest on your loan, the bank gives a miniscule fraction of interest to its other customers and keeps the vast majority of the profit. And somewhere in the distance, the monocled Monopoly Man smiles.
In contrast, DeFi relies on a little something called “smart contracts” to connect financial participants together. A smart contract is simply a program on a blockchain that executes when conditions are met. For example, if I wanted to get a loan using DeFi instead of a bank, I could use a smart contract to use my crypto assets as collateral. The smart contract would then put a hold on a portion of my funds, lend me the requested funds, and once I’ve paid the loan back in full, the smart contract releases the hold. You can participate on either side of this equation as the borrower or the lender, and in either case, you’ve officially cut out the middleman and your return on investment skyrockets to many times what any bank would dare offer. Collect $200 and pass Go, my friend.
If this sounds too sci-fi…