What should we do about all this DeFi stuff?
Some time ago it was the Ico stuff and now everybody is crazy about this DeFi. The problem here is that probably 90% of all the users don't get what it actually means. I've read somewhere a great definition of DeFi:
DeFi is when nerds start to understand how finance is working
unfortunately I don't remember the author
So yes DeFi is mainly something that is understood by people who are interested in code and numbers. For us common mortals it's just stuff that we have difficulties to grasp.
I worked for a certain time as a banker in a small Swiss Bank and I had the chance to learn everything about banking. Without understanding all the code, the smart contracts and the basis of the math behind, I get that DeFi tries to substitute the monopoly of the banks.
Let's say you have a portfolio of shares. Your bank could use these shares as collateral and give you a credit. For this credit you pay an interest.
On the other side, the bank offers savings accounts to their customers. The bank pays an interest on the capital deposited. The bank makes a profit with the interest margin.
Platforms like Maker Dao, Compound or Aave offer the possibility to store cryptos into a vault and give you credit for it. Your cryptos are still yours but you can use the credit to invest, trade or whatever.
Interests are offered to people who deposit assets.
In the past you needed a broker to trade shares or other commodities. You had to call him and deposit your order on the market. For that you had to pay a fee called courtages. Fortunately with time you started to be able to trade directly online. The funny thing is that these courtages certainly decreased but are still around. The bank has to live one way or another.
With platforms like uniswap you can exchange coins and tokens in an automated way using liquidity pools instead of order books. The people providing liquidity get a part of the fees and they can make a profit like that.
A bank has the ability to give a loan. This loan will then be used by another person as collateral again to get another loan. This is the way how normal banks can increase the money supply.
Thanks to lending platforms like Maker Dao, it is now possible for us to increase the money supply. We can give our Ether as collateral and get DAI for it. This DAI then changes hand. The other user can then use this same DAI as collateral for another loan. Through all this we have increased the money supply. DeFi allows us to print money....
In all cases thanks to DeFi the middle man, the bank has been cut out of the equation. This saves a lot of costs.
What does DeFi bring to all of us?
I believe that a big part of the hype will pass but we are still at the beginning of all this and it can change our financial world in the long term.
What are the challenges?
At the moment DeFi is quite restricted to people who understand it and people who have quite a big portfolio. The big majority of the DeFi is taking part on the Etherium blockchain and because of the demand the transaction costs and especially the costs for smart contracts is going through the roof.
DeFi has to become accessible to the average people. It has to become understandable and easy to use. The nerds developed their projects, now it's the time of the normally clever people to take over and make all this simple and easy...
What do you think about DeFi?
My free e-mail course: The 100'000 satoshis a week strategy