Decentralized Finance or shortened as DeFi is among the most thrilling phenomena within the crypto world today. It can be quite a large and bewildering term as it might sound initially, but it is easier to conceptualize when we apply it to the daily life. In simple terms, DeFi is a financial system that eliminates middleman, such as banks or payment companies, and enables individuals to conduct transactions directly in the blockchain technology.
I would like to illustrate it by a simple example. Suppose I am in need of sending money to my friend in a different city. I would usually use a mobile or bank application. It also takes the bank a long time to process it and it may also be charged a fee. However, when using DeFi, I can send the money straight to my friend through a decentralized application (so-called dApp), and it arrives practically right away, at a lower cost. It is equivalent to purchasing food right off the farm rather than going through the hands of middlemen who include additional expenses.
Borrowing and lending is yet another example. With our system where we used to be used to borrow, I have to visit a bank, fill in papers, and even take days before I could get the money. My credit history will also be examined by the bank before making the decision. However, in DeFi, being able to borrow is as easy as placing your crypto in a smart contract. A smart contract is similar to an electronic contract that is self-defeating and does not involve humans. As soon as the terms are satisfied, the transaction occurs immediately - no paperwork, no permission of a manager.
Another similarity that comes to my mind with DeFi is how Nigerians deposit money within the country in local savings groups, known as ajo or esusu. Each member contributes some amount of money on a regular basis and everybody turns towards taking up the amount at a time. Similarly, DeFi applications collect money and have people to participate and earn interest or rewards. It is just that DeFi does it with technology such that it is accessible to anyone in the world.
The reason why I think DeFi is the most amazing is because it returns the financial power to the common people. You do not require a bank account or any form of special permission, only a smartphone and internet access. Sometimes, however, it is also risky as a transaction is never reversible, and there are cases when hackers may also use insecure systems.
Overall, DeFi is a reconstruction of our conventional finance, but this time, it uses technology and liberation. To me, I realized it by taking it in simple illustrations so that I would enjoy how it could transform the future of finance particularly to young Nigerians like myself who are willing to embrace new things.
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