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January 11, 2022

What is DeFi? Part 2 of 2

This is the second of our two episodes on decentralized finance, or just “DeFI” in short.

If you are just jumping in here, we recommend you listen to the previous episode where we explain why traditional financial products are nothing more than contracts traded and executed through banks.

DeFi gets rid of those banks, who act as a powerful middleman. But how does that work? Let’s dig in.

Remember that blockchains like Ethereum are “programmable money”. Crypto developers can just write any financial contract in computer code. That’s called a “smart contract”.

That could be a simple financial instrument like stock or options. And there are real advantages to doing it on a blockchain: First, since the contract is written in plain code and stored on the blockchain, anyone with the skills can read it, which creates full transparency.

Second, and most importantly, you don’t need banks facilitating these contracts anymore. Two parties can enter into those contracts directly through the power of a decentralized blockchain.

So, what are some popular examples? Take lending: You could lend someone Ethereum, and the smart contract determines how much interest you get, when you get the money back, and gives you a token in return that represents what you lent so ownership is documented.

Or ownership in a company: If you own what’s called a “governance token”, which represents a stake in the company or project that issued it, you have verifiable ownership, and may even get voting rights. It’s just like real stock, but on the blockchain.

And next time, we’ll spend more time on the subject of stock on the blockchain, and will explain what an ICO is!

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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