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A Quick Look at What DeFi is and How it Operates

By Adam Torkildson. Originally published at ValueWalk.

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DeFi is an abbreviation for decentralized finance and is pronounced ‘dee-fye’. It’s an umbrella phrase for the crypto universe’s efforts to create a new, internet-native financial system by replacing existing intermediaries and trust mechanisms with blockchains.

Let’s take a step back. In the conventional financial system, intermediaries such as banks or stock exchanges are required to transmit or receive money. And, in order to feel at ease with the transaction, all parties must have faith that the intermediaries will behave properly and honestly.

These intermediaries are replaced by software in DeFi. People trade directly with one another instead of going via banks and stock exchanges, with blockchain-based “smart contracts” handling the job of generating markets, settling deals, and ensuring that the entire process is fair and trustworthy.

So DeFi is the cryptocurrency equivalent of a stock exchange?

That’s a factor. However, DeFi also covers loan platforms, prediction markets, options, and derivatives.

Essentially, crypto enthusiasts are creating their own version of Wall Street, one that is largely decentralized and only deals in cryptocurrency, with crypto versions of many of the products offered by traditional financial firms, and without much of the red tape and regulations that govern the current financial system.

Concerns are also being expressed about crypto companies that provide loans, credit cards, and savings accounts without many of the protections or precautions provided by traditional banks. Regulators in the United States have begun to crack down on companies who sell these goods, claiming that they pose a risk to customers.

Regulators are also investigating decentralized exchanges, or DEXs, which enable users to exchange cryptocurrencies using market-making algorithms.

Why would someone join up for something like this?

For starters, because DeFi is so new and unregulated, it appeals to many individuals. Building a whole new financial system from the ground up is a rare intellectual challenge, and many individuals are drawn to the sector’s wide open, blank slate potential. Furthermore, if you’re a skilled trader or a seasoned financial engineer, you could accomplish things in DeFi that you couldn’t do in the old financial system, and possibly make a lot of money very rapidly.

Second, many DeFi supporters say that blockchains are technologically better than the current financial system, which is based on old databases and obsolete programming. (For example, most bank transactions still rely on programs written in COBOL, a programming language that goes back to the 1960s.) They claim that cryptocurrency is the first form of money designed just for the internet and that as it expands, it will require a new, internet-native financial system to sustain it.

Third, if you believe in the crypto/web3 vision of a decentralized economy, DeFi is the financial architecture that makes all of your dreams a reality. A DAO cannot produce a membership token out of thin air and use it to raise millions of dollars in the traditional financial system. You can’t contact JPMorgan Chase or Goldman Sachs and ask for a quote on Smooth Love Potion in Dogecoin. However, using DeFi platforms, you may discover individuals eager to exchange practically any crypto asset for almost any other crypto asset, with no requirement for clearance from a central organization.

The DeFi initiative Babyloncontributes to the solution by turning investment into a multiplayer game. Babylon’s Garden is an excellent venue for investing in DeFi. Babylon is a system for decentralized asset management in which deposits are owned and managed by the community.

Crypto has created a massive opportunity for new investors, and the only way to fully capitalize on this new-age market is to join an investment community. Decentralizing finance, some argue, might help repair what’s wrong with our existing financial system, in part by reducing major Wall Street banks’ control over our economy and markets.

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