TheWeb3Capsule#016 Decentralized Finance is going to fire your banker.

The future of Finance is already present.

If you still open this News-letter then I believe you understand by now how Web3 technologies are a real revolution in regards to ‘How we do things’. 

So far however I didn't develop on how it enables people to interact easily with current existing industries. 

In other words, how Web3 builds a bridge between existing solutions and wider market segments, see those tech as facilitators.  

The topic of this week is DeFi also known as Decentralised Finance.

I love to define words separately when they move by pair so first one needs to understand that finance represents all the products and services you can buy in relation to money. 

This includes: 

1/ Life insurance 

2/ Interests on saving accounts

3/ Complexe investment portfolio products proposed by banks or hedge funds.

4/ Investing through financial assets purchases such as stocks, bonds or indexes.

I think you got the picture, if the service/product promises to increase the capital, then it’s a financial one.

Why talk about decentralized finance then ? 

In the current financial system every institution is centralized, super regulated and well to be honest does structurally favor people with higher income.

It’s called : Difference of treatment on the base of the starting capital. 

Not everyone gets to play with the same cards. 

Downward leveling might be one of the reasons the poor stay poor and the rich become even richer. 

That’s the first reason why Finance as we know it failed big time. 

The second reason is funds sourcing.

If your income comes principally from activities such as cryptos trading, betting or poker, many banks will either close their doors to you or ask for 30 documentation everytime you receive money.

Call this discrimination based on moral taboos and well, it’s illegal no company has the legal right to restrain you financial operations based on a judgment they have over your profession. If your profession is legal in your countries then the bank must obey. If they believe you're a shady person then that’s the rôle of a court to decide. 

All those abuses are only possible on the behalf of centralization and no real alternatives. 

If you don’t open a bank account and don’t live on cash well, you’re doomed.

Okay Othmane that’s great but what is DeFi and how is it different from Current finance ?

The main difference is the infrastructure on which the system relies, while one is based  principally on human decisions. By keeping a big room for humans, triggering the final decisions leads to both bias and discrimination. 

DeFi is based on code and smart contracts. Embedded conditions and action that automatically gets activated.  The magic here is that you don’t need to be called Jean de La maisonblanche and have 200 millions to invest to get access to the best financial products. 

The best thing about it ? You only need an internet connection and a few hundred bucks to get started. 

The revolution here is in the market penetration of the technology, DeFi is fundamentally easier to use than any fancy current institution funds, not only easier it’s also more diverse, gives more room for complex creations and finally it’s a cheaper alternative.

Of course it is when you don’t need a Bac+10 in bullshit to accept to give you a loan when a computer would have done it better for 1/1000 of the hourly labor rate…

Anyway, let me bring some nuance to something I said earlier. Remember how traditional finance doesn't provide the best products and services based on your starting capital ? 

Well that doesn't mean they do it on purpose to keep one poor, but the structure of the systeme on which flows of money relies is extremely expensive. 

As an example you can't access the portfolio that will provide you with a 7% interest if you had 10 000$ to invest. 

The fees to put your capital to work on those complex products will be higher than your capital. 

Well DeFi solves this, so far so good. 

But on why is it based ? 

1/ Financial services are provided through decentralized, open-source protocols, smart contracts and blockchain.

2/ It eliminates the need for third-party intermediaries, users interact with one another in a trustless, secure and transparent environment (Bye-Bye banks).

3/ Protocols are built on top of existing public blockchains such as Ethereum.

If you’re still reluctant to why you should care, here’s one element that might help you change your mind :  

Protocols are transparent. 

Everyone gets access to the roots of money flows, you can self audit the protocol you decide to use. Said otherwise, imagine you get to see exactly what BnpParibas or SocieteGeneral does with your savings account money + you also get to audit their systems to see if they’re secure enough. 

If you don’t have the competences to do it yourself guess what ? 

Thousands of people around the world do it everyday. Transparency of the ecosystem even put in place something called ‘Bounty’, no i am not talking about the coco bar. 

A bounty is a reward given to any person that will identify a security breach and report it to the team behind a protocol.

By using DeFi you benefit from the global consensus of experts. 

Last point, why should you care about DeFi, why will it impact your life ? 

Well there's two main types of DeFi platforms. 

1/ Lending and borrowing : 

The purpose of those platforms is to match in a trustless environment lenders and borrowers. You need money for a specific reason ? 

→ You can put a collateral and borrow over it

You want to put your money at work to gain interest ?

→ Depositi it to lend it to people.

DeFi allows you to do this in a seamless and automated way.

Here’s a visual to show you how it works.

2/ Decentralized exchanges : 

To buy and sell Crypto the main choice is to get through centralized platforms such as Binance or Coinbase. But there’s alternatives for that and it's called DEX for decentralized exchanges. 

Why need them ? 

Well if your project is still new being listed in a centralized exchange costs a lot but is a guarantee of finding liquidity and making your project known + credible.

DeFi is here to stay but still has risks associated with it. A topic that I will treat another day.

If you read this far i would like to know, send me an email or a DM ! 

Have a blessed week everyone !