Could you explain the concept behind decentralized finance in layman terms and how it is revolutionary in nature? What are the downsides of it?
The basic concept of decentralized finance is to create all of these composable basic finance primitives, that are implemented as smart contracts with some degree of decentralization.
How decentralized is defi?
One of the things we’re going to be talking about today is what exactly does it mean to say some degree of decentralization. There is a balance to strike in how decentralized a platform is between fully decentralized – when no one has any control and if something goes wrong, all of the funds go “poof” as we saw with the DAO – to somewhat decentralized with some governance overrides, maybe an escape hatch for when problems happen to shut down the smart contract and refund funds… and of course not so decentralized when there are effectively management keys that allow all of the functions of the smart contract to be overridden by a small number of parties. And there’s all of the range in between.
So that’s the “De” for decentralized in DeFi.
Of course, the “Fi” part means that this is primarily focused on financial products, and that means lending, investing, borrowing, saving, implementing various forms of currency tokens, non-fungible tokens, various forms of asset-backed tokens and things like that, crowd funding and crowd raising or fund raising mechanisms such as token bonded curves. That’s the fancy term used in the Ethereum space.
And for the most part we’re talking about DeFi as a function that has come out of the development of Ethereum. But of course DeFi isn’t restricted to Ethereum. Quite the opposite, DeFi is an entire industry.
Decentralized finance vs centralized finance
The best way I’d like to describe DeFi is by contrast to CeFi. CeFi, of course, is centralized finance. That’s when somebody else takes your money, abuses it to implement political favors in their benefit, and then charges you for the privilege of them holding your money. And perhaps, if you’re lucky they give it back to you, perhaps not, while enriching themselves unfairly in a parasitical co-dependent relationship with government. That’s CeFi.
DeFi can only fail by becoming CeFi
So DeFi really can’t fail, UNLESS it becomes CeFi. The reason is because CeFi is already an incredibly damaging parasitic system that plagues our planet.
DeFi is an approach that is primarily focused on decentralizing the power dynamic. That’s the real key here – who has power over money. And by decentralizing power over money, what opportunities does that give people to have better relationships with their money? And not be exploited, as well as how does that increase access to financial services, by disintermediating all the gatekeepers that prevent and limit access to financial services. Effectively banking the unbanked or de-banking all of us.