What is Decentralized Finance (DeFi): A Beginner Friendly Guide

Decentralized Finance (DeFi) is a blockchain technology and non-custodial financial product that offers more control over your money. In fact, DeFi offers many benefits that our current Traditional Financial system can’t, such as transparency, self-custody, 24/7 open market, less fees, fast transactions and more. The infrastructure that DeFi uses removes the barriers in today’s financial system like capital requirements and access to foreign markets, hence, making the system more accessible to everyone. Interesting, right?

Even though, being fairly new, Decentralized Finance (DeFi) drew many people’s attention. DeFi, with its financial applications, simplifies the financial services by making banking cheaper, easier and more accessible to people all around the world than what TradFi (Traditional Finance) can provide. To be able to understand what you will read in this article, you don’t need to be a finance nerd or crypto bull, you just need to be someone curious who gives value to your hard-won dollars…

Although it’s a new concept in our lives, DeFi is expeditiously going mainstream. Of course, the smart contracts, protocols and d’apps (decentralized applications) play a crucial role in DeFi to attain its goal of “reaching the masses”.

To be able to understand how DeFi works, here are some terms you should know:

Smart Contracts are the codes that execute the orders of buyers and sellers automatically. They reduce human error significantly and are an important asset in decentralization.

Protocols are the layers working on top of blockchains that run smart contracts in a platform.

Decentralized applications, also known as d’apps, bring protocols to the masses with an easy user interface that makes it look simple to use. Thanks to d’apps, DeFi will reach the masses.

Proof of Work requires solving complex math problems for ensuring the network’s safety. Spends too much computing effort and energy while creating a new block on the blockchain.

Proof of Stake is another network for decentralized systems. There are validators (think of them as miners that sign new blocks) and delegators (stake owners or coin holders) that secure the system. On the contrary, to reach a consensus, PoS offers more decentralization by promoting a more participatory and democratic network. Also consumes significantly less energy than PoW systems.

Is DeFi the “Future of Finance”?

Let’s make it clearer. Decentralized Finance (DeFi) is a blockchain technology people can use easily for their financial needs without any centralized authority. It removes the middleman and strict regulations, and also gives you more power over your money. DeFi is more than a tool for sending and receiving money. Main purpose of Decentralized Finance is to offer financial solutions- lending, borrowing, trading, insurance etc, just like it’s competitor TradFi (Traditional Finance). DeFi provides an open-source, permissionless and transparent service for everybody’s financial needs.

DeFi as an alternative to TradFi is a new concept in our current financial system. On top of the individual benefits of it, it is also better for the environment than Bitcoin and other PoW based crypto assets. To read about how decentralized consensus mechanism PoS is better for the environment click here. This system also consumes less resources than today’s TradFi since it does not need infrastructure like buildings, ATMs, paper money, or a work force to implement customers’ needs, Traditional Finance requires significantly more resources than Decentralized Finance.

TradFi, What Went Wrong?

The term “TradFi” refers to traditional finance, and essentially relates to the centralized, conventional banking system. First of all, Traditional Finance has a significant role in many people’s daily lives due to being the most common financial services provider in the market. TradFi institutions are centralized, regulated by the governments and rely on a lot of paperwork. Also, the Central Banks that are under the influence of the governments, implement monetary policy through TradFi institutions.

TradFi services are expensive to use. For example, Western Union charges $10 to send $100 cash from the United States to someone’s bank account in Argentina, and it can take up to 4 days to receive. With DeFi it costs less than $1 and takes seconds to receive.

TradFi is also not flexible enough to easily absorb the new advancements in finance, and not transparent like DeFi. Flexibility is an important aspect to catch up with the advancements in tech. Each day our life becomes more and more digitized , as well as solutions to our financial needs. DeFi provides up-to -date technology for banking, payments, saving and investment opportunities with less cost. While in TradFi, transferring money from one bank to another takes more time, in DeFi, transferring money between different blockchains naturally takes less time. Also, considering the ongoing developments in DeFi, especially after the system upgrade on Ethereum and Cosmos blockchains, the transaction fees will be even less for the users. In terms of transparency, blockchains keep everything more transparent since everyone can observe the executed transactions on the blockchain. Another important thing is, unlike TradFi, DeFi gives people more power to participate in the decision making process for their governance.

FinTech companies that provide more flexible financial solutions than TradFi, are less centralized, and have a more progressive approach to finance than TradFi yet still carry more similarities to TradFi and do not even come close to DeFi. FinTech companies, like Venmo and Transferwise provide more flexible financial solutions for their customers within Traditional Finance. However, their customers still pay high fees and can face problems such as account suspension, verification issues and delay in money transfer.

As a matter of fact, TradFi is getting older, slower and not flexible enough for today’s rapidly advancing technology and increasing demand for new financial services or solutions. Today, we live in a world where people are more educated and more skeptical. An institution that is more expensive, less transparent and private will inevitably lose its power against DeFi.

In Decentralized Finance, people join the decision making process by voting on the governance proposals which makes finance more democratic, open, participatory and trustworthy. However, in TradFi, there is no participation in the decision making process for finance. Centrally governed institutions make their own decisions that might not always be in the public’s best interest. Therefore, DeFi gives people more power of managing “money” in contrast to its predecessor TradFi.

Why Do We Need DeFi Instead of TradFi?

The reason why Decentralized Finance started to take off is the way DeFi approaches money. Decentralized Finance came out of the need for being more democratic and participatory as well as the need for less interference by governments. Even though we live in 2021, access to financial services for people depends on where they live. Some people can easily reach financial services, some can reach but can not afford the cost of their trades or investments, some can’t due to the strict regulations and borders, and some do not trust the financial infrastructure in their countries. Although DeFi is still in its early days, it’s promising. It gives an opportunity to people to have more control over their money and reduce the barriers for the financial solutions.

Since the Central Banks were meant to be independent in terms of monetary policy making, many governments intervene in those policy making processes of the Central Banks which means they may not be independent anymore, or may not have ever been independent. No central bank can be entirely independent of government influence. Therefore, decentralized finance with no centralized regulation provides better financial solutions via blockchain technology. DeFi removes the middleman and the interference to give more freedom to people.

Unfortunately, many countries in Africa, Middle East, Asia and Latin America faced governmental intervention in the monetary policy making process and their people paid the price as high inflation. Here are some examples of approximate high inflation rates in different countries of Africa, Middle East, Asia and Latin America: Nigeria 16%, Sudan 163%, Lebanon 88%, Turkey 18%, Iran 35% Pakistan 11% and Argentina 42% — % rise compared to last year. Sadly, many governments do not give enough importance to their citizens’ needs, they just want to collect their taxes so they print money as they wish for short term solutions, resulting in more fiat money deflation every year.. Thanks to blockchain technology offering more transparency, people will find a chance to observe the money transactions of their Central Banks and their governments.

The Real Deal: Neo-Banking Systems

DeFi is still in an experimental phase. The financial market is so big, TradFi and the governments are the two biggest players who are not willingly sharing what they have. However, there were no easy transformations in the history of the world. The Kash team thinks that TradFi will be sharing the future financial system with DeFi. One will not wipe the other one out but both will coexist in the market merging the best of both worlds. To be successful in the market, DeFi projects need to have solid smart contracts and protocols as well as decentralized applications that will bring them to non-crypto users. Kash aims to bring DeFi applications such as saving and investing to the masses.

One more issue for DeFi is the unit of currency. Since, DeFi will not use fiat money, it needs decentralized stable coins. Stable coins are crypto currencies with their pegs 1:1 tied to a certain fiat currency. Since cryptocurrencies are too volatile to use as a worldwide payment method, Kash uses stable coins for its financial services . The top 4 biggest decentralized stable coins in the market based on their market cap are USDT, USDC, BUSD and DAI. Kash uses UST (pegged to USD) stable coin to provide better saving, investing and payment services. Compared to its competitors from TradFi, Kash offers their customers up to 20% APY, access to foreign stocks and lower transaction fees. To create your free Kash account and start your DeFi adventure today, please visit Kash.

If DeFi as a concept promotes decentralization, transparency and openness; it must run on decentralized stable coins. Luckily, even though being in an experimental level like the whole DeFi concept, there is a promising advancement in stable coins as well- algorithmic decentralized stable coins.

For instance, algorithmic decentralized stable coin such as UST (Terra USD) aims to achieve price stability and maintain its peg algorithmically. Algorithmic stable coins hold their pegs during high volatility by minting and burning the asset it collateralized. In the UST case, it’s backed by (Terra) LUNA. Algo stable coins do not need a higher authority to keep that balance, the code makes it by itself..

Click here to create your Kash neo-bank account by using your Gmail, Discord, Twitch or Facebook in seconds. Start enjoying the benefits of DeFi with interest rates up to 20% and trade tokenized stocks 24/7!