If there’s one thing that demonstrates how well decentralised finance can work, it’s the relationship between DeFi and crypto. Cryptocurrency operates via blockchain technologies, using secure distributed ledgers to trade. Because DeFi requires blockchain technology to function as a decentralised entity, that necessitates a close relationship with cryptocurrency in order to allow for access and complete transparency on a cross-platform basis.
But don’t get too worried about transparency when it comes to privacy – one of the most significant benefits of decentralised finance is that DeFi allows you to be pseudonymous. Many of the most well-known users and creators operate under pseudonyms, allowing total privacy in their personal lives even with transparency in their DeFi and crypto dealings.
As it stands – with crypto the only usable currency on the blockchain – the relationship between DeFi and crypto is symbiotic. DeFi is primarily built on the Ethereum blockchain and typically engages users via software called DApps (“decentralised apps”). According to Coindesk, “Many other cryptocurrencies now compete with Ethereum to run DeFi applications, such as Avalanche, Terra, Fantom and others, but it is important to note that Ethereum is the largest network and was the first project that was used to create DeFi.”
As a result, decentralised finance – DeFi – is available to anyone with a decent internet connection and some crypto. Once you’re in, that’s where the fun begins. This combination of DeFi and crypto enables users to access a whole new world of financial possibilities. Users can purchase NFTs, borrow money from a centralised provider, lend crypto to others to accrue interest, exchange tokens and even try their luck in a no-loss lottery-like PoolTogether.
And that’s only the beginning of what crypto can do with DeFi. It all functions through the use of smart contracts, which are automated processes that quickly, efficiently and transparently enable actions between users. For instance, on a very simple level, if 0.1 ether is sent to User X, then User X will automatically send an NFT back. This process, enabled by DeFi, allows for a streamlined transition of assets.
However, deciding to invest in a DeFi application is not to be taken lightly, so you must ensure you’ve got all the information. Because DeFi is open and trustless, that means there’s no governing body to dictate what should or shouldn’t happen. You have to be able to weigh up the risk and cost, especially when involving crypto because once a smart contract is enacted, it can’t be undone.
But don’t let that steer you away from embracing the DeFi ecosystem. DeFi and crypto are consistently on the rise, and there are plenty of opportunities for individuals and businesses to make their mark by adopting the technologies earlier rather than later. In fact, the benefits for business are huge, with one of the leading markets in the DeFi ecosystem being crowdfunding.
Businesses can use DeFi applications to crowdfund projects worldwide with full transparency eliminating the common fundraising concern of, “where is my money going?” Then there’s quadratic funding, which – according to Gitcoin – is the “mathematically optimal way of funding public goods democratically”.
On a practical level, this means that any donations from crowdfunding are matched by an existing pool of donations from larger donors. Then, once public interest decides which projects are the most beneficial or worthy of support, the funds are allocated to the most democratically popular campaign. This could have a tremendous amount of traction and impact on fledgling businesses and entrepreneurs seeking funding.
But even aside from all the practical applications, the point remains that the symbiotic relationship between DeFi and crypto is creating an ecosystem where the power is back in the hands of users. Once you understand where your money is, what your assets are, and what you can do with them? Well, the options are endless.
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