For one to understand why Defi (decentralized finance) is going to change the world economic structure as we know it, one must realize how unjust and unethical the banking business truly is. This is an extremely complex subject to understand and I'll try my best to explain my perspective on it.

History:

The reason why banks came into existence was only to have a secure location to store people's money and to give out loans on interest to the ones in need. Historically, temples were considered the first ever banks to have existed. Many of the kings stored part of their precious metals like gold and silver in temples as the priests usually stayed their and to top off the security aspect, so did God himself. This was the main reason why temples were ransacked when countries invaded each other. Fast forward to the 18th century, the era which was the birth of the modern banking system created by a prominent German family known as the Rothschild, who even to this date, own all the central banks of most major countries. The Rothschild are pioneers of the banking sector with a history of funding several European Kings, having continued to fund present day powerful governments like England and France. No piece of information written about banks is complete without mentioning the Rothschild as such is the prominence of their legacy when it comes to banking.

Traditional banking:

In today's world, traditional banks have drifted miles apart from just storing money and giving out loans. Over the years they have gained so much trust with the help of governments that every single person has no hesitation depositing their money into banks or even questioning the transparency of their actions. Two astounding facts no one seems to bat an eye on is fractional reserve banking and the illusion of "I have control over my money" when you deposit into a bank, which is a major fallacy. To be clear, banks have complete control of your money and full authority to utilize the same to make investments into private companies and hedge funds. These hedge funds in turn invest into equities and commodities, which in a successful economy can yield very high returns. While the banks reap most if not all profits made from YOUR money, you get negligible interest on your deposit and "security" of funds in return. Sounds like a terrible deal to me.

Coming to fractional reserve banking, this is a policy which gives banks the ability to loan out money with only a fraction held in reserves. To illustrate, you deposit 100$ into a bank. The bank is required to hold only 10% of your deposit as reserves and loan out the remaining 90$ while charging interest on the principal amount thus increasing the supply of money to 190$. This causes inflation and reduces purchasing power, affecting poorly on average citizens. To my understanding, this is the reason why we live in an economy full of bad debt. Banks tempt people to take out loans by lowering interest rates while some of them invest those loans into products which yield no revenue. In this case we do have some responsibility to take for our actions but it’s no excuse for this fraudulent system of fractional reserve banking, creating money which shouldn't exist in the first place.

(Side note: Current reserve rate set by the FED is 0%, which means the bank is not required hold any reserves to give out loans)

Key inferences one should draw from the above information is knowing that you have no control over your funds when you deposit money in a bank, vicious cycles of fractional reserve banking and the destructive concept of centralization which gives ambiguous people the power and authority to take decisions behind closed doors. This is why the concept of decentralized finance or Defi is revolutionary, changing the world of finance as we know it.

Defi (Decentralised Finance):

Defi is an emerging technology utilizing the power of blockchain to provide permission-less financial services irrespective of borders, allowing anyone to get these benefits without even having a bank account. To many this statement is not impressive as you may have the privilege of having a bank account but imagine this tool in a developing nation where getting a loan or a bank account approved is difficult based on many factors such as educational background work history or not having certain documents required by the bank. You may think you still need a bank account to convert your money to crypto but there are open market places such as local bitcoins where one can buy crypto using cash by directly purchasing it with no middlemen. This opens up the financial world to every person on earth with an internet connection. You are not required to produce personal/sensitive information to any centralized authority to obtain features like security, as in this case you become your own bank, or services like lending/borrowing, which is basically coded into smart contracts having pre-defined set of rules with no human intervention making it much easier to verify and trust the entire process. Anyone can borrow loans using crypto as collateral or earn interest on their crypto by providing liquidity to decentralized exchanges. All of this with no hassles of credit scores, providing sensitive documents or worry of YOUR money being seized by any central authority if they decide to do so. What makes this even better is all of the code written in most cases are open source, meaning it can be audited by the public. You can also contribute to the code by making improvements which can be implemented by consensus of the community. To me, this is a very powerful movement as it is giving back the power to the people. Let me help you understand this concept in a better way by giving you an example.

Borrow:

Alex lives in a locality where acquiring a loan is very difficult due to stringent rules set by the banks such as credit scores, minimum income requirements and work experience making it difficult for him to invest into a business. With the help of Defi, Alex buys crypto which he then uses as collateral to borrow a loan. This does not require him to have any credit scores, minimum income requirements or work experience and it opens up a world of opportunities for him to invest and make money to repay his loans. All of this happens within predefined smart contracts with no middlemen and most importantly low annualized interest rates. This is very powerful as it is potentially increasing the wealth of people who previously couldn’t access these financial instruments.

Lend:

Let’s assume Alex has a bank account and he deposits his money into it. The average interest earned on deposits around the world is 1.6% annually. Not to forget these banks utilize Alex’s money to invest and earn significant profits while giving back negligible returns. Defi enables Alex to convert his fiat currency to stable cryptocurrency and earn up to 10% interest annually. That’s more than 6 times the interest compared to traditional banks. Defi makes it evident that it’s redistributing wealth and power back to the people, the same people who trusted big corporations and were deceived.

To conclude, this innovation in the coming years, will entirely revolutionize the financial industry. Unlike big banks and corporations who are self-centered, looking out for their own well-being and success, Defi creates a level playing field for every person on this planet giving equal opportunity. While this was just a basic introduction to banking and Defi, we will be diving deep into the Defi world helping you understand various projects, their purpose and how they are creating value on a global scale.

Follow us on Twitter for interesting crypto content such as the above. To know more about us feel free to visit our website.