De-FI is an abbreviation for Decentralised Finance and it is changing the global financial landscape. So, what exactly is decentralized finance? De-Fi has arisen in sync with the blockchain revolution and a smart contract platform called "Ethereum" which is an entire universe or the first world computer providing a base technology layer on which every conceivable application is being built to transact business in a secure, borderless and efficient manner. Decentralized Finance or the ability to trade stock, token or asset transactions on decentralized exchanges "peer to peer" without a middleman such as a traditional stock exchange, dramatically lowers the fee structure of what you would pay on a traditional exchange.
You can now trade stocks, tokens and soon, every type of commodity, asset and collectable "peer to peer" directly without a "trusted middle party" e.g. a bank or stock exchange.These new decentralized platforms also known as DEX's are "Peer to Peer" and "trustless" meaning they do not require Person A knowing and trusting Person B to make a trade or exchange. The Decentralized Exchange (DEX) itself provides the mechanism for a secure exchange.
The Gamestop debacle has opened people's eyes to the fact that not only are "free trading" platforms such as Robinhood not free, they are also subject to censorship rendering the retail investor powerless when it suits the centralized exchanges. Retail buyers and sellers may not know it, but they pay a mark-up or mark-down in the price of any financial instrument (when they buy or sell) essentially paying a premiium for each transaction which is pocketed by the exchange and its partners. Furthermore, as Gamestop investors found out, once losses to a select number of hedge funds became too acute, Robinhood stepped in - under pressure from its peers - to halt or limit trading to the detriment of retail investors.
The stark awakening to the harsher realities of Wall Street has created a natural opening for the discussion of "Decentralized Finance" of DEFI.
Cameron Winkelvos (well known for his role in the ideation of Facebook and successful lawsuit and settlement with Facebook) recently commented “The pandemic made people appreciate Bitcoin as an inflation hedge. The de-platforming of Wall Street Bets is making everyone appreciate it’s censorship resistance.”
And by people, he is referring to legends on Wall Street such as Paul Tudor Jones and Stanley Druckenmiller who came out supporting Bitcoin as a hedge against inflation earlier in 2020, comparing the Bitcoin asset class to investing in the internet in the early 90's. When these giants speak, Wall Street listens. When they invest, other professional funds re-evaluate.
The traditional investment world is being exposed and people are waking up to the fact that they have an alternative avenue to trade assets in a manner that is censorship resistant and 24/7 available to them, around the clock. In addition, DEFI allows the ordinary person to participate in the market making pool. Individuals can supply liquidity e.g. dollars into the market making pool and earn a share of the small fees charged for each transaction.
Blockchain technology is evolving quckly. Some might say, not quickly enough! The Ethereum platform, for example, through which financial transactions are facilitated is congested due to the enormous volume of activity which is raising the cost of moving money in and out of decentralized as well as centralized exchanges. A new update being dubbed Ethereum 2.0 is in the works this year which will dramatically increase the speed and transactional throughput of the network which combined with other proposals have the potential to dramatically lower the costs of moving money in and out of exchanges and personal (digital) wallets.
The enormous savings that can result from blockchain technology are in the process of transforming access to finance. You can buy a dollar stable coin such as USDC - which is the equivalent of a US dollar - and earn up to 7-8% interest for doing so. That is 8-20x the interest you can earn at your high street bank. You can engage or disengage at any time from financial institutions with no lock up time commitments to earn these yields. There is more risk involved compared to holding your assets in a bank but that risk measured against the interest returned vs in a bank. is a trade off that is not stopping an onslaught of money entering the blockcahin universe.
Another thing being facilitated by DEFI is access to loans. You can borrow money at very reasonable rates with interest only payments, easy renewal terms and almost zero headaches compared to going to a bank or third party lender charging usurious rates. What is even better is that you can apply and have your money in hand within 24-48 hours.
Assets tied up in decentralized finance grew from less than hundred million in early 2020 to over $25 billion. Analysts see this as the mere beginning of an unstoppable trend that is only going to grow in its sophistication, capabilities and benefits. We hope this article has peaked your interest and given you a glimpse into this new emerging industry.
We hope you find this information interesting and that it gives you a glimpse into this emerging market and how traditional finance is slowly shifting in its attitudes to the emerging digital currency and blockchain industry. If you are interested in learning more, we will revisit this topic in our blog in 2021 and you can always find a lot of information about this emerging industry online as well.