DeFi is a term you’ll have to get familiar with sooner than later because it’s taking the finance world by storm. And you better have an umbrella, because when it rains, it pours.

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It’s a concept that has been shaking things up in the finance and Web3 virtual ecosystems, and it’s here to impact the design and marketing worlds and even the way we conceive transactions from a high level.

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So, to make this topic a bit more comprehensive, we’ll sync up on what DeFi is, how it works, how it affects prices, smart contracts, and how it’s related to Web3 with DeFi design and DeFi marketing involved.

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It sounds like a lot, but it’s much simpler than it looks.

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Now, let’s get started, shall we?

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What is DeFi?

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DeFi stands for Decentralized Finance, which can be defined as an alternative to Centralized Finance, in which financial instruments can be used and moved without having intermediaries. This is possible through smart contracts and blockchain technology (which we dissected in our latest blog post — check it out here).

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This means that DeFi, in general, advocates for financial liberty and the power of taking ownership of your assets without having to rely on external (and centralized) entities to do so.

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But it all started a long time ago, more precisely in 2008.

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This person (or persons, or business), Satoshi Nakamoto, created what is now known as Bitcoin (shortened as BTC) — the world’s first decentralized cryptocurrency. 

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He (or them) was responsible for the Bitcoin whitepaper (2008), its first implementation, and the original blockchain database. But that’s enough of ancient history for now — in short, that’s how DeFi was created and is directly affecting many areas such as finance, retail, and even creating new principles as in DeFi design and DeFi marketing.

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Now, following the original line of thought, and just like Coinbase says:

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“DeFi (or “decentralized finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum. With DeFi, you can do most of the things banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it’s faster and doesn’t require paperwork or a third party. As with crypto generally, DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), pseudonymous, and open to all.”

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This, in plain English, means that even though the standard process for asset building and management requires a centralized entity’s support (let’s say, a Bank) to trade, borrow, or buy, in this case, you can practically do the same minus the paperwork or delay that standard Centralized Finance involves.

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Besides, it’s faster because it’s based on a P2P system, drastically reducing fraud attempts and providing secure communication.

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Pretty simple, isn’t it? 

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“It is. But how does DeFi work? Are there any more benefits?”

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And that’s a great question. Let’s begin by explaining how DeFi works in a nutshell.

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According to Investopedia, DeFi “uses the blockchain technology that cryptocurrencies use. A blockchain is a distributed and secured database or ledger. Applications called dApps are used to handle transactions and run the blockchain”.

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This means that decentralized finance involves pretty much the same technology that Bitcoin, Ethereum, and many other cryptocurrencies use in a wide range of matters — call it DeFi Design, DeFi Marketing, or blockchain applications overall.

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Now, diving a bit deeper into the functionality of Decentralized Finance:

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It’s crucial to understand that these decentralized transactions are first recorded in “blocks” (as in blockchain), which users verify beforehand. 

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If the user accepts and verifies the transaction, that block is considered closed and encrypted. This equation repeats itself several times to provide the utmost standard of security to each transaction for both parties.

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There’s a great analogy to explain how Decentralized Finance works — comparing this model to the familiar one: Centralized Finance.

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Think about your last trip to the Bank to ask for a loan.

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Sorry for bringing up those unpleasant memories, but bear with me for a second.

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You enter the Bank. Go to the front desk. Ask to see your executive, and start negotiating your loan. The executive lays out the terms and conditions. Then, they do some background checks, and if you’re lucky enough, you get your loan approved with crazy fees.

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That’s how it works for Centralized Finance. Now, Decentralized Finance, on the other hand…

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It’s much more straightforward, frictionless, and trustworthy.

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Why? Because it’s based on simplicity — the same goes for DeFi design and DeFi marketing.

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Decentralized Finance is an umbrella term for financial services in the blockchain space — primarily based on Ethereum. 

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That said, there are key differences that make DeFi special: Its inherent benefits!

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For example…

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• It allows the user to hold its money instead of having a third party do so 
• The user controls where the money goes instead of allowing companies to manage it for them
• Transactions are not coupled to the user’s identity — they use a pseudonym
• Transactions happen within minutes, instead of waiting for business days
• The market is always open, au contraire from banks who usually take days off

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And most importantly…

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DeFi is open for anyone to use. Centralized Finance pushes the user to apply to use their financial services, making it tedious, more complex, and inaccessible for some people.

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That opens up the DeFi market for several agents, opening the gates for new ways to include design, web applications, and even marketing formulas to simplify people’s lives for the better.

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Sure, not everyone knows what a smart contract is, or what Bitcoin, Decentralized Finance, or even Web 3 are all about — but eventually, every design, marketing, and finance component will fall into the DeFi environment… And we want to help people be as prepared as they can by when the time comes.

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How does DeFi improve the current state of trading?

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Short answer: It simplifies, speeds up, and empowers transactions from a peer-to-peer standpoint. 

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That’s because DeFi, the same as Web3, enables both involved parties to exchange assets in significantly less time than Centralized Finance would allow them to.

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It’s also crucial to note that, because the market is always open, transactions could happen within minutes at any time of the day, any day of the year.

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No holidays, no sick leaves, no business days.

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Your money, your conditions, on your time. That’s how DeFi brings people together.

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How does DeFi make cheaper financing possible?

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By simplifying how financing is done, in fewer words.

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But first, let us explain what a DeFi loan is.

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A DeFi loan is like a basic centralized bank loan but with a trustless approach. It allows the user to lock their assets without worrying about intermediaries. It’s P2P lending, directly from the decentralized platform.

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Instead of negotiating with a bank, you’ll accept the terms and conditions from a particular lender and get your loan within minutes. It’s designed to work at a fast velocity, reducing friction to the bare minimum.

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According to 101 Blockchains, “DeFi lending helps users lend their crypto to another individual and earn interest on the amount they have loaned. Conventionally, banks have been the go-to destinations for any loan. If you needed a loan, you had to go to the Bank. However, the rise of DeFi has enabled any individual to become a lender, just like a bank. You can loan your assets to others and accrue interest on the loan”.

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Following that line of thought, DeFi makes cheaper financing possible because of its core principles:

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• Programmability: Allowing users to automate the execution of smart contracts.
• Self-custody: Allowing users to protect their assets with Web3 wallets, like Metamask in the Ethereum blockchain.
• Interoperability: Allowing users to obtain loans in different cryptocurrencies.
• Permissionless access: Allowing users to use DeFi apps, as long as they have a crypto wallet.

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In short, DeFi makes financing cheaper through simple, frictionless programming and functionality.

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Or, like Mashable defines using DeFi for personal benefit: “Dead simple, even for a newbie.”

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Is DeFi the future of finance?

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The future could come knocking on our doors anytime. But saying that DeFi is the future of finance is a safe thing to say. 

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Especially considering how it has reshaped the financial system and made millions of people question how they’ve put up with Centralized Finance for so long without looking for an accessible alternative for true financial freedom.

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In Duke Corporate Education’s words:

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“On many dimensions, our financial system is letting us down. Retailers, often operating on razor-thin margins, not only face 3% transaction fees on credit card transactions but wait weeks for funding to show up in their accounts. Why is money transfer today so expensive, slow, and insecure? And consider some of the other more general problems with the current financial system. Why are savings rates zero or negative? Why are borrowing rates so high? How is it possible, in the age of the internet, that it can take two days to transfer ownership after buying shares in a company? Why, during the global financial crisis, did we have to bail out the very institutions that caused the crisis? And why are 1.7 billion people in the world unbanked – and many more underbanked?”

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This seeds an exciting question:

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How could it not be the future of finance if it’s solving the main problems Centralized Finance has been carrying for centuries?

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And, even more, how could it not be the future of finance if it’s supporting an entire digital ecosystem, providing jobs, and enabling transactions without much more trouble than having Internet access?

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Food for thought.

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What challenges could hold DeFi back from growing?

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Yet, we can’t see the world through rose-colored glasses — there are challenges, and some are far from being solved.

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According to Entrepreneur, DeFi is mainly appealing due to its inherent decentralization. Forgive the redundancy, but decentralization is one of DeFi’s most vital selling points to convince people to join.

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However, as things stand today, replacing laws and regulations with smart contracts could not be for everyone.

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As they said:

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“An impartial ecosystem backed by automation sounds terrific — kind of like the science fiction utopias imagined by Isaac Asimov and Arthur C. Clarke. But the reality is that the darker elements of human nature can still interfere with this utopian environment, as you can see from the history of failed cryptocurrency projects like Mt. Gox and BitConnect.

Although Bitcoin’s blockchain technology is designed to be nearly impenetrable, there’s still the possibility of the network being compromised via a 51 percent attack. Additionally, the development of Ethereum and smart contracts has been no stranger to controversy, with many of the most utopian promises from its developers not being met.”

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Sure, it’s a long way to the top, and most challenges are being tackled — but there’s work to do.

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Bottom line, there’s hope for DeFi to overcome its inherent challenges — that’s what technology is all about—reshaping the present to live a better future.

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And we’re throwing in our two cents of advice on Web3, Web3 design, and DeFi in our Newsletter.

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Yeah, we are.

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We believe that doing your research builds character, but it shouldn’t be as draining as it is now.

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That’s why we send monthly reports, updates, and reading topics on Web3, Web3 design, Web3 marketing, and DeFi to our readers in our monthly Newsletter.

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Until next time,

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The Spark + Mint Team