What is DeFi?
DeFi, a shortened term for Decentralized Finance, is a system of financial products becoming available on a public decentralized blockchain network making them open for everyone to use, rather than going through middlemen like banks or brokerages. More specifically, DeFi refers to a system by which software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer to peer or with a strictly software-based middleman rather than a company or institution facilitating a transaction.
DeFi applications aim to recreate traditional financial systems, like banks and exchanges, but with the use of cryptocurrency running on the Ethereum blockchain. Anyone can now do most of the things that centralized financial institutions support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but in a safer and faster way that doesn’t require any paperwork or a third party.
It takes the basic premise of cryptocurrencies and expands it, creating a digital version of Wall Street minus all the associated costs (rent, maintenance, salaries, transfer fees), allowing more open, free, and fair financial markets to rise that are accessible to anyone on the internet. Here are the other reasons why people are exploring their financial options on DeFi systems.
- Open to all
You don’t need to apply and submit requirements like you do in regular banks. You just need to create a wallet and link it to DeFi apps.
Using DeFi doesn’t require any government-issued IDs, Social Security number, nor providing your address to prove your identity.
You can move your assets anywhere around the world at any time, without asking for permission, waiting for long transfers to finish, and paying expensive fees.
Interest rates and rewards on DeFi almost update instantly (usually every 15 seconds), and are significantly higher than traditional stock exchanges.
Everyone involved can see the full set of transactions. Private entities rarely grant the kind of transparency that decentralized finance offers.
Why are DeFi apps built on Ethereum?
Unlike Bitcoin, the Ethereum blockchain is easier to use to build other types of decentralized applications (dApps) beyond simple transactions because of the platform’s smart contracts. Smart contracts allows flexibility in the creation of dApps and works by automatically executing transactions if certain conditions are met. There are dozens of DeFi applications currently operating on Ethereum, and below are the most popular types:
- Decentralized exchanges (DEXs)
A type of online exchange where users can trade, buy, or sell any type of currency, regardless if it’s U.S. dollars for BTC or ETH for DAI. They connect users directly to other users so trading cryptocurrencies is done without an intermediary.
A cryptocurrency that’s tied to an asset outside of cryptocurrency (the dollar or euro, for example) to stabilize the price.
- Lending platforms
These platforms use smart contracts to replace intermediaries such as banks that manage lending in the middle.
- “Wrapped” bitcoins (WBTC)
A way of sending bitcoin to the Ethereum network so the bitcoin can be used directly in Ethereum’s DeFi system. WBTCs allow users to earn interest on the bitcoin they lend out via the decentralized lending platforms described above.
- Prediction markets
Markets for betting on the outcome of future events, such as elections. The goal of DeFi versions of prediction markets is to offer the same functionality but without intermediaries.
- Yield farming
For knowledgeable traders who are willing to take on risk, there’s yield farming, where users scan through various DeFi tokens in search of opportunities for larger returns.
- Liquidity mining
When DeFi applications entice users to their platform by giving them free tokens. This has been the buzziest form of yield farming yet.
DeFi apps are open source, meaning the code behind them is public for anyone to view. As such, these apps can be used to “compose” new apps with the code as building blocks.
How will Rand help Gen Zs achieve their financial goals through DeFi?
Rand aims to bring a financial gateway to all Gen Zs who are looking to make their hard-earned money work for them because even if we are living in a fully digital world, the average young adult population still don’t have any financial tool that suits their economic needs. The Rand Network is a project built to:
- Allow users to win big prizes in the shortest term possible with near-zero risk.
- Allow friends or family members to save and earn together for a common goal.
- Create an easy-to-use app for everyone, no matter what their crypto knowledge is.
We make saving while earning effortless for everyone by funding a common pool — funds coming from the deposits of users — and lending it out to several DeFi apps (listed above), allowing them to gain yield (interest). After a preset time, all the interests earned are distributed to the winners of the pool which is chosen by lottery (applicable for Public Parties) or distributed to a close group of people accordingly (applicable for Private Parties).
To know more about how Rand is maximizing the potential of DeFi apps to solve the financial problems faced by average Gen Zs, check out the Rand Solution page of our whitepaper.