What is DeFi?

For those that were around in 2018, we used to call this “open finance.” That construction seems to have faded, though, and “DeFi” is the new lingo. 

In case that doesn’t jog your memory, DeFi is all the things that let you play with money, and the only identification you need is a crypto wallet.

I can explain this but nothing really brings it home like trying one of these applications.

If you have an Ethereum wallet that has even $30 worth of crypto in it, go do something on one of these products.

1. Pop over to Uniswap and buy yourself some BAT (a token to buy ads).

2. Go to MakerDAO and create $15 worth of DAI (a stablecoin that tends to be worth $1) out of the digital ether.

3. Go to Compound and borrow $10 in USDC.

Notice the very small amounts I’m suggesting. The old crypto saying “don’t put in more than you can afford to lose” goes double for DeFi. This stuff is suber-complex and a lot can go wrong. These may be “savings” products but they’re not for your retirement savings.

Immature and experimental though it may be, the technology’s implications are staggering. On the normal web, you can’t buy a toaster without giving the site owner enough data to learn your whole life history. In DeFi, you can borrow money without anyone even asking for your name.

DeFi applications don’t worry about trusting you because they have the collateral you put up to back your debt (on Compound, for instance, a $10 debt will require around $20 in collateral).

If you do take this advice and try something, note that you can swap all these things back as soon as you’ve taken them out.

Open the loan and close it 10 minutes later. It’s fine. Fair warning: It might cost you a tiny bit in fees, and the cost of using Ethereum itself right now is much higher than usual, in part due to this fresh new activity. But it’s nothing that should ruin a crypto user.

Most people do it for some kind of trade. The most obvious example, to short a token (the act of profiting if its price falls). It’s also good for someone who wants to hold onto a token but still play the market.

In the next article let’s learn how these Decentralized Banks get money to run their projects: https://blog.brozbot.com/2020/09/14/how-defis-have-money-to-run-a-decentralized-bank/