DeFi, or decentralized finance, is a consortium of peer-to-peer financial services that uses blockchain technology and eliminates the need for intermediaries. DeFi aims to remove a central authority or middlemen from financial transactions such as loans, insurance, buying/selling digital assets, derivatives, or crowdfunding. With no middlemen, such as governments, banks, or companies who can block or restrict access to financial services, DeFi aims to democratize access to these services for everyone.
To understand DeFi, we have to understand the history of cryptocurrencies. Bitcoin was released in 2009 and became one of the most successful cryptocurrencies. Bitcoin essentially became decentralized digital money not controlled by a central bank or government. Bitcoin was built using blockchain technology and cryptography to create a secure, public blockchain accessible for use by anyone. This accessibility is in contrast to traditional finance, where access is limited by KYC/AML regulations for services such as having a savings account at a bank, trading stocks on a centralized stock exchange (CEX) like Robinhood, or applying for a loan.
Know Your Customer (KYC) are a set of guidelines in many countries that require the financial institution, such as a bank, to collect and periodically verify identifiable information about a person before allowing them to access the institution’s financial services. For example, if you would like to open a savings account at a bank, the bank would require you to give personal information about yourself such as your Tax ID number, driver’s license number, photo, and home address to fulfill KYC guidelines determined by the country’s government. While this information is very personal, refusal would stop you from obtaining these financial services in many countries. KYC ties directly into Anti-Money Laundering (AML) regulations, where governments use KYC to restrict individuals or entities from utilizing financial services for criminal activity. Many governments would have a list of individuals that each financial institution must refuse service. While governments have used KYC/AML regulations to stop criminal activity, they have also been accused of using these guidelines for political means. For example, many financial institutions that do business internationally are restricted from offering services to citizens of Cuba or Iran due to sanctions by the U.S. government. While there may be reasons for these sanctions, the blanket ban based only on nationality economically harms millions of people who haven’t committed any crimes.
The exclusion of hundreds of millions people from the global financial system is the impetus and one of the leading factors behind the growth of DeFi. In DeFi, there is no KYC process needed or restrictions based on nationality. While Bitcoin was revolutionary, its application was limited. One could only send money, or Bitcoin, to each other. Bitcoin lacked the functionality to do more complex financial transactions such as loans, insurance, or trading assets like stocks. To go beyond this significant limitation of Bitcoin, the Ethereum blockchain was launched in 2015. Ethereum is a decentralized, open source blockchain with smart contract functionality. With smart contracts, which Bitcoin did not have, users are able to create dApps (decentralized applications). Smart contracts, or dApps, are computer code that runs on top of a blockchain with a set of rules under which the parties using the smart contract agree to interact with each other. If and when the predefined rules are met, the agreement is automatically enforced. Ethereum allowed for the creation of DEXs (decentralized exchanges), savings accounts with high interest, and lending/borrowing platforms.
However, Ethereum has suffered from scalability issues and high transaction costs, making the platform unusable for day-to-day transactions and for users with small amounts of money. Many other blockchains have been released to correct the inefficiencies of Ethereum, one of the biggest being Cardano.
Currently, many DeFi projects are being developed on Cardano, including Genius Yield. Genius Yield is creating two DeFi dApps, a DEX and AI-powered yield optimizer. The Genius Yield team has also created Genius X, an accelerator program for early-stage blockchain startups. There are currently many DeFi projects in the Genius X program such as Healthera, Ledgity, Loqul, and Maestro.
DeFi is revolutionary, with the ability to provide financial services to anyone in the world. Previous services such as loans and banking, thought to be only available for citizens in developed countries, are now available for everyone. Additionally, with scalable, low fee blockchains supporting DeFi applications, it's likely more and more financial services will migrate to these solutions, or at least start adding DeFi alternatives in conjunction with traditional financial services.