What is DeFi?
DeFi is short for Decentralized Finance. The core ethos around DeFi is to provide an open financial system that is available to everyone regardless of race, gender, class or whatever social construct the traditional financial system sometimes uses. The idea is that no central authority should have a hold over your financial life. As individuals, we should have complete freedom and sovereignty over every aspect of our financial life.
In order for this to happen, DeFi would need to support services that today’s financial institutions provide, such as: Basic Banking, Lending & Borrowing, Brokerage type services, Stable Coins etc… more on this later. This is why all these various cryptocurrency projects are popping up. Currently, the largest DeFi ecosystem is Ethereum and this is why you hear so much about it.
Before we dig a little deeper, let’s get some terminology out of the way because it will help simplify things a lot as we move along.
An asset is essentially anything that has intrinsic value, but also will hopefully appreciate over time. Examples:
Commodities - Gold, Silver, Platinum, Water etc.
Real Estate - Land, Houses, Buildings etc.
Equities - Public Stocks, Private Equity etc.
Misc. Hard Assets - Art, Memorabilia etc.
Fiat - money i.e. cash, which can be in USD, CAD, EUR, GBP etc. (now we could argue this is a depreciating asset, since it loses value over time due to inflation, but that’s a whole other discussion)
Each of the main bullet point groups above are essentially various types of “Asset Classes”. Now let’s insert a new Asset Class called “Crypto”. Within Crypto we have assets like Bitcoin, Ethereum, Litecoin etc. These are all Cryptocurrency assets.
Within Crypto assets, we have Coins and we have Tokens. A lot of people use them anyhow, but there is a big difference. A Coin is a cryptocurrency that has its own Blockchain. Examples:
Bitcoin is a blockchain and the currency is BTC
Ethereum is a blockchain and the currency is ETH
Cardano is a blockchain and the currency is ADA
The best real world comparison I can give is to think of the United States (or any country) as a Blockchain with each of them having their own currency, which in this case is USD. In order to transact in the United States, you have to use USD.
A Token on the other hand is a cryptocurrency that does not have its own blockchain, but runs on another blockchain. Example:
Shiba Inu (SHIB) is a token and runs on the Ethereum blockchain
A transaction in simple terms is the exchange of something of equal value between 2 (or more) entities. Those entities could be people, institutions or even machines. It doesn’t matter. The point here is that a transaction requires at least 2 participants. Everyday of our lives, we perform transactions. The most common is probably the exchange of Time for Money, you work a job to get compensated. Other examples are exchange of money for Goods and Services or even exchange of Money (USD) for Money (CAD).
Performing a transaction always come at a cost. In the real world those costs could be things like service fees, taxes, subscriptions etc. Similarly in the Crypto world, it will cost you a fee in order to perform a transaction. Those costs are typically referred to as “Gas Fees”. A gas fee is essentially a network fee needed for the Blockchain to process and validate your transaction from Point A to B.
To be continued…
There is a lot to unpack here. Take the time to understand the terms because it will add so much clarity as we talk more about DeFi. I will continue with Part II in the next issue.
As always, this is not financial advice. I use this as a way to journal my thoughts and share with anyone else interested enough to want to read this, as well as for educational purposes only.