DeFi is becoming more relevant everyday, but it is not well understood, so we are going to break it down.

Traditional Finance

Traditional financial institutions are centralized. 

They have a central authority — usually a corporation — which owns the business and is responsible for operations, products and services, profits and losses, strategy, and the like.

The corporation is also responsible for the security of its customers’ money. Sometimes, a government insures these customer accounts, adding a second central authority layer.

Ownership is typically divided among shareholders and trust is established over time via many factors including dependability, reputation, brand, and insurance.

In the US, large banks like Bank of America or Citigroup are examples of traditional financial institutions as are large insurance companies like Allstate and Berkshire Hathaway.

DeFi

Decentralized Finance (DeFi) is a new set of systems that aims to serve similar functions as traditional institutions, while removing the centralized authority layer described above.

DeFi does this through the transparent and trustless nature of the blockchain.

Infrastructure is code on the Blockchain.

This means users are able to access financial services without the traditional gate-keepers.

While it is very early in the evolution of DeFi, plenty of products are live.

We can lend and borrow money, make payments, trade, and earn interest on savings.

Further, we can create a wallet and an account without sharing personal information with a traditional financial institution and move assets anywhere at any time. 

Bank holidays do not apply. 

As of January 27, 2022 — the DeFi market has more than $90B in total deposits. 

Uniswap — A DeFi Example 

Uniswap is an open-sourced decentralized exchange (DEX) that allows users to trade crypto anywhere in the world 24/7/365. 

Anyone with a smartphone and an internet connection can trade anonymously.

As of January 27, 2022 — Uniswap has $6.3B in total deposits. 

This is the eighth installment in The Osprey Crypto Made Simple Series where we describe a concept clearly and concisely. If there’s something you would like us to define, please reply to this Newsletter email or, if you are reading this on the web, hit us directly at riley@ospreyfunds.io.

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