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There’s a significant shift happening with blockchain technology right now.
An entirely new world of financial opportunities is getting created that have never existed before.
This whole trend is called decentralized finance or DeFi for short.
It has the power to change the current financial system as we know it, and an overwhelming majority of all the DeFi innovation and activity right now is happening on top of the Ethereum platform.
Because of that, we want to give you five reasons why Ethereum is the future of finance.
We want to talk about this as a blockchain developer who works the Ethereum protocol daily.
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The DeFi space has exploded in the past year.
As we mentioned before, it’s created all these crazy new opportunities that have never existed before, anywhere else!
That makes it a competitive landscape for the financial system, as we know it.
Whether this completely replaces the current financial system or creates a real competitive alternative remains to be seen.
But this is a pandora’s box situation, where you know DeFi has been let out of the box, and there’s no putting it back in.
We think that the future is very bright for DeFi.
You can kind of think about this as an introduction to DeFi because we see this floating around social media.
Many people say, hey, I want an article to share with my friends, who have never heard of DeFi, before, like how it works and why it’s essential.
So, the first reason we think DeFi on top of Ethereum in the future is that it offers benefits to the end-user that they cannot get in the traditional financial system.
So, there are all kinds of these benefits, but we want to focus on the first use case that we think the average person can understand: competitive savings rates.
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We’ve got a DeFi app called Compound Finance, and it’s a money market app, which lets you deposit funds into it with cryptocurrency, where you earn interest just like a bank.
It lets people borrow cryptocurrency on the other side and pay interest on those loans, also like a bank.
We want to focus on the dead simple use case, which we think most people understand: competitive savings rates on their deposits.
So, suppose you look at a cryptocurrency USDT. In that case, this is a stable cryptocurrency whose price doesn’t change its pegged to the US dollar, and it earns 5.63% interest annually on that deposit. So we don’t know if you’re like me we get hardly any interest on my deposit my bank account with my cash.
And we think most ordinary people realize this and realize that DeFi can offer them a benefit that they can’t get inside their bank account.
So why is that?
Well, essentially, DeFi is doing the same things your bank is.
You’re depositing funds into it. They’re paying you interest for doing that.
But then, they’re issuing loans on the other side and making a profit off the difference in those interest rates.
Whereas DeFi introduces automation into the equation because it’s a protocol powered by smart contracts on the blockchain.
It requires you to know less workforce to make that work.
It’s automated, and so they can offer that competitive deposit interest to you.
You know that better savings rate and now quick caveat here DeFi is still early.
It’s still risky.
We’re not advocating that you go and take all the savings in your bank account, moving them over to a DeFi app. But we do think this will get better over time.
As we see, third-party protocols implement deposit insurance a lot as your bank does, and this ecosystem matures and becomes safer for the end-user.
Honestly, we think we’re going to see a lot of centralized user interfaces come out in the future, where users don’t even think about DeFi. They log in with their email and password and earn these types of benefits.
Then there are some companies, which do DeFi on the back end and charge for that service.
That’s highly likely to happen, but there will still DeFi under the hood, and that’s the critical part.
So, the second reason DeFi is the future of finance is that it is decentralized, and that’s where decentralized De and DeFi comes from.
So, what does that mean?
Let’s contrast that from the current finder system, which is highly centralized, where there’s a massive amount of central control that governs what you can and can’t do in the traditional financial system.
So let’s contrast that to DeFi on top of Ethereum and see how they’re different.
One clear example, which people can understand, is the wall street Game Stop saga that happened, you know, early this year, or an online group tried to coordinate to trigger a short squeeze for some hedge funds.
Many more powerful people were able to step in and pause the game so that the little guys couldn’t continue to act and that the big guys could try to fix the mess they were in the middle of so.
Let’s look at two big benefits that something like decentralized finance would offer in this case.
When somebody says, “Hey, we’re gonna pause trading and not let the little guy act.” That’s censorship. Whereas, in Ethereum, at least at the protocol level, no one can pause the game.
Also, because it’s a decentralized ecosystem, it allows people to coordinate in large numbers to make up a collective with power against centralized concentrations of, you know, power and money.
Now, we’re not advocating for like pump and dump schemes or other nefarious activity.
However, it still empowers the individual in a way that the traditional fire system does not, where regulators can quickly come in and censor a large group of individuals who might have too much power.
This censorship resistance also comes into play whenever new projects launch on top of the blockchain itself.
In a truly decentralized ecosystem like Ethereum, you know that nobody can shut it down once a project is launched out there in the wild.
Of course, regulators could come in and say, hey, we’re not going to let our citizens use this, and of course, they could prosecute the people responsible for creating it.
But once it’s out there, it’s out there.
This is where Ethereum has a huge edge over its competitors, living out there in the wild today.
Ethereum is the most decentralized working implementation of you know blockchain smart contract platform where you can do DeFi today.
It has a ton of momentum to maintain that position for the short to mid and the long term.
That means that you don’t need anybody’s permission to do DeFi if you have cryptocurrency.
You can go to any of these websites or any of these protocols and use them now.
We know many people say, well, there are still these central points of failure to get onto a cryptocurrency exchange and KYC to buy cryptocurrency.
There’s some truth to get into the system, but once you’re in the system itself, no one can tell you what you can and can’t do, so here’s why that’s important.
So, once you’re in the system, you don’t have to get approved for a margin account.
For example, to trade on margin, you can short, use leverage, and do all this stuff that you would typically have to jump through all these hoops to do in the traditional financial system.
Now we know some of those things are risky, but it still opens the door for basic things.
For example, some people can’t even be approved to have a credit card. Those barriers are removed entirely in the DeFi ecosystem on top of Ethereum today now.
Of course, gas fees are high on top of the Ethereum network right now
Some people say, “Well, hey! That’s a barrier for normal people because they’re going to get priced out of most transactions in DeFi.”
That is true today, but that won’t necessarily be the case forever.
We’re close to having layer two scaling solutions on top of Ethereum.
That will be widely adopted that will improve this problem, and once we do, you know this problem gets a lot better and can enhance the permissionless nature of DeFi.
Again, this is super early.
There are many times to work through the current problems we have in DeFi today, but the permissionless nature is one of the biggest reasons we’re so bullish on it in the long term.
This is different from our first point where we said like, “Hey! It offers benefits that you can’t get we’re talking about.”
Like that’s competitive savings rates.
We have saving rates nutritional finance, but we have things in DeFi that don’t even exist in traditional finance.
We think we’ll see a lot more down the road, but here are two prominent ones that come to mind that we think a lot of people are familiar with.
Think about an app like Uniswap, for example. This is one most popular apps on top of Ethereum, right.
Now it’s a cryptocurrency exchange where you buy and sell tokens just with a click of a button.
There are no order books.
There are no candlestick charts.
It works entirely differently than other cryptocurrency exchanges or traditional financial exchanges that you might be familiar with.
So, Uniswap works on the back end of these things called liquidity pools, where people can park cryptocurrency to provide liquidity to the application.
They’re incentivized to do that because they earn part of the trading fees, and the end-user gets a clean user experience, where they swap tokens, you know, like this.
So, that’s an example of something you can do with DeFi and blockchain technologies, but you can’t do the traditional financial system.
There’s no way to like trustlessly create an incentive structure like that where you can power a decentralized application that can’t be turned off.
So, another use case is something you can do in DeFi.
You can’t do in traditional finance are flash loans, such as entirely permissionless, completely decentralized.
This is where you can borrow millions of dollars of cryptocurrency for free, with nobody’s permission, as long as you pay it back in the same transaction that you borrowed it in.
So, you can use this for stuff like arbitrage trading.
You can use it for leverage when you’re doing yield farming and DeFi and many other crazy things.
Flash loans are crazy. It’s like this mind-blowing futuristic concept, and there’s no way to accomplish something like that inside the traditional financial system.
Sure, you could say like some crazy margin account or something like that, but one of the big benefits of a flash loan is there’s no risk that you can lose the money that you borrow, so it’s not the same thing.
You know we talked about how this space has exploded over the past year, and it’s gotten a lot of mainstream attention, and we’re already starting to see mainstream adoption of DeFi.
Now granted, it’s on a small scale, but it’s captured the attention of some influential people out there.
We’ve seen people like Mark Cuban become huge Ethereum bulls.
We’ve been talking about that on this website, many other people see the same thing, and they’re going to where you can do DeFi right now, which is on top of Ethereum.
You know why so many people are having this AHA moment and talking about online spreading.
There are still lots of problems that must be solved, but it has so much momentum.
It’s captured the attention of so many big brains which have a lot of capital to invest to see this ecosystem grow, and also a ton of reach to, you know, market this to millions and millions if not billions of people.
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