What is DeFi?

In an age of constant disruption, DeFi is going to be a game changer. That’s because the financial sphere, and the way we use money, is due for a change. So what is DeFi? It stands for decentralized finance, perhaps better known as crypto finance. And it’s going to disrupt finance as we know it, by effectively eliminating the middlemen. Through coding and through protocols, within cryptographic code, we could be banking without banks. 

The World of Decentralized Finance

Essentially, the world of decentralized finance consists of a system where people could earn interest off their crypto currency. In this space, they could also collateralize their coins and borrow against their value, or they could lend. It’s almost like peer-to-peer lending, but without a third-party coordinator. In the current peer-to-peer model, you’d have to go to a website like LendingHome to facilitate the process. A third party. 

DeFi and crytpo can eliminate this third party, where lending can be negotiated between two parties. This is made possible through the coding of these currencies, as well as smart contracts. 

Our Current Banking System

Currently, our central banks run the show. They issue money and get to decide on how much is issued. Every country has their own central bank to call these shots. In the United States, for example, trillions of dollars have been printed by the Federal Reserve in 2020 alone. They oversee the money supply. They also have complete control over interest rates. 

Then, there’s the LIBOR, or London Inter-Banking Offered Rate. This rate is determined by many banks negotiating together on a rate at which they would lend money to each other. Then they basically average that rate. Massive scandals have arisen from the LIBOR, about collusion and rigged rates. 

There’s no doubt that our current system is challenged. The Fed can print money, and we have no say in that. Interest rates can be set by banks. LIBOR rates can be rigged by banks in their favor. Decentralized finance levels the field through technology and computer coding like opensource blockchain technology. This makes the currency un-hackable. 

Bitcoin and DeFi

To set the stage, we must consider the supply of cryptocurrency. For Bitcoin, there will only ever be 21 million Bitcoins “mined.” Some have already disappeared, but you can never mine more than 21 million of them. There’s a fixed supply that cannot be manipulated through code. 

You can even trade Bitcoin globally, sent directly through your virtual wallet. You have no bank to answer to or partner with to complete a transaction. Bitcoin is our first real example of decentralized finance. Now that the future is quickly catching up to us, thanks to the innovations of 2020, you can expect the same of cryptocurrency and decentralized finance. The way we borrow and loan money, and how we generate income from investments, is going to change through DeFi. 

In summary, DeFi is a financial ecosystem based in code rather than third parties. There’s no regulation through some system like the Federal Reserve, it’s all digital. And there is no shortage of ways to get into this right now. You could be earning 6% on Bitcoin in a crypto bank right now, or 4.5% on Ethereum. Just having it allows you to partake in the infinite banking system, which previously could only be done through whole life insurance. However, you can place your crypto up for collateral in a real estate deal today. 

At some stage, there will be another financial reset. And I think that DeFi will pick up the pieces. So, it’s going to be quite incredible. All of it will be on the blockchain, all of it will be protocols and code and smart contracts, which are on the Ethereum platform.

You can listen to my new podcast, Cashflow Investing Secrets here.

Live your Freedom, Live Your Legacy, On Your Own Terms,

M.C.

M.C. Laubscher is a husband, dad, podcaster & Cashflow Specialist. He helps business owners and investors create, recover, warehouse & multiply cashflow. You can learn more about exclusive cash flow strategies in M.C.’s new video series at https://www.yourownbankingsystem.com/

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