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January 11, 2022

What is DeFi? Part 1 of 2

Today and tomorrow, we’ll dive into the world of DeFI, short for “decentralized finance”, where blockchains are used to replace the world of traditional banking.

In this episode, we’ll explain how the world of traditional finance works, so you understand where things are coming from.

Imagine sitting on the busy trade floor of an investment bank. What is actually going on here? People are busy on the phones, looking at screens, taking orders and placing orders on behalf of clients everywhere.

It might sound crazy simple, but those financial instruments being traded are all just contracts: Promises to get or give something in return for a payment, often at a specific date. Take stocks for example. If you buy one Apple stock for $150 dollar, in return you get to vote on shareholder proposals - it’s nothing more than a controlling interest in a company. It just happens to fluctuate in price, so you might make money holding it.

Or take options as another example: Those are contracts to agree to buy or sell stock for a predetermined price at a later date. It’s essentially a gamble on the future value of that stock.

Those traders on the trade floor, what do they do? They sit in the middle, matching buyers with sellers, to make transactions happen, and then collect a fee. In other words, they are a centralized institution.

And that’s the whole point of DeFi, to create a decentralized system that can do all of that, cheaper and better. And next time, we’ll explain how traditional contracts work in the DeFi world.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.

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