What Is DeFi?
So what is DeFi, and why is it interesting? To understand it, you have to look at “normal” financial tools. Loans, mortgages and insurance are all examples of traditional financial services that banks and brokers offer.
There are a number pain points with these services:
- • Approvals and claims often take weeks
- • Institutions charge fees
- • They’re hard to access in poorly developed countries
- • Lots of documentation is needed (credit checks, proof of address, etc.)
What if there was a way though to remove banks and other middlemen from these financial services?
Enter decentralized finance, or DeFi for short. DeFi refers to a group of special apps — similar to the apps on your smartphone — where people can access various financial services.
These apps are known as decentralized applications, or “dapps.”
The main difference being, these dapps are built to work autonomously without any company or person acting in the middle.
Think of a traditional ride-hailing app like Uber, Lyft or Bolt.
Each time a driver pairs with a customer on the app and completes a journey, the company that created the app takes a cut of the driver’s profits.
But imagine if those apps operated completely autonomously, and instead of a company taking a cut each time, every driver got to keep 100% of their earnings.
There are two clear benefits here:
- • Dapps completely remove middlemen.
- • Individuals can offer services directly to their customers and keep more of their profits.
Now, instead of a ride-hailing app imagine an app where you could access a range of traditional financial services like loans, mortgages and insurance without having to deal with a bank or insurance company.
That would be pretty cool, right?
People would be able to lend money to anyone in the world without the help of a bank and borrowers could receive loans without having to provide documentation or pass credit checks.
Insurance payouts could also be automated through dapps to dramatically streamline claims.
Sounds great, right? But wait, there are some drawbacks to DeFi.
Some dapps are created quickly and cheaply, and this leads to potential bugs or errors in the underlying code. In some instances, these bugs have led to users losing their invested money.
Another issue with DeFi is the prevalence of scams and fraud.
Unfortunately, there have been some instances where dapp creators have disappeared with users funds using a type of exit scam known as a “rug pull.”
