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January 29, 2021 Jill Gordon

A Beginner’s Guide to DeFi

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The future is here, and while the flying cars that were promised haven’t arrived yet, the finance world is speeding full-force into the future with everything from wireless payment apps on our phones to entirely decentralized finance systems.

Decentralized finance, known as DeFi for short, is a fundamentally new financial system that moves monetary control away from centralized banks and towards public blockchains.

Put more simply, DeFi has the potential to change the underlying mechanics of financing and banking, as well as how people access financial services, by using the internet and smart devices instead of going through a centralized bank.

What Is Centralized Finance?

In order to understand DeFi, it is helpful to understand how the traditional financial system works. In general, the current US financial system is largely controlled by central authorities.

For example, some aspects of the financial system are controlled by the Federal Reserve (sometimes referred to as “The Fed”). The Federal Reserve, which serves as the nation’s central bank, was created in 1913 after several financial panics caused people to withdraw their money from decentralized banks. Mass withdrawals of money caused banks to fail and incited more financial crises.

cash management accounts, financial management apps, and ATM access, each of those things actually requires turning over that money to an institution and trusting that intermediary to manage it. The underlying goal of DeFi is to give actual control by using blockchain technology and open source coding to do the same types of transactions that currently take place largely through financial institutions.

Blockchain technology is a term commonly used in relation to cryptocurrency. At its most basic, blockchain can be thought of as a secure logbook that records transactions but is not controlled by a centralized institution. Rather, accountability in the blockchain is ensured because the “chain” is not editable and is stored in many places instead of in one centralized institution.

If this sounds familiar, it may be because blockchain serves as the “building blocks” of cryptocurrency like bitcoin. To understand DeFi, however, it is only important to understand that blockchain is secure, automatically generated, and able to be examined and tracked, just like a physical ledger. And unlike banks, blockchain is stored on users’ computers, which means that it’s not controlled by a central authority like the Fed.

In order for cryptocurrency like bitcoin to exist, it needs a secure ledger to track it—that’s blockchain. So is DeFi just a synonym for bitcoin and other cryptocurrencies? Not exactly. While cryptocurrencies are decentralized when it comes to issuance, transfer, and storage, they are still centralized when it comes to access and management.

Specifically, you still need to access cryptocurrencies through centralized exchanges, and many cryptocurrency projects are managed through companies which functionally act as that intermediary that DeFi seeks to eliminate. Some cryptocurrencies even tie their worth to physical currencies like the US dollar to attempt to provide stability.

DeFi takes crypto to the next level by attempting to give the benefits of cryptocurrency without the need to tie access and management through centralized access points or companies, which can obscure the open nature of these transfers and potentially lead to abuse of the system.

DeFi is a network of open-source apps based on blockchain that allow users to engage in financial acts in an entirely peer-created, peer-reviewed, open-source world, which is all based on the security of blockchain.

Because everything within the DeFi crypto universe is open source, users theoretically have the control to engage in a wide variety of financial transactions with the assurance provided by the underlying blockchain technology.

How Can Decentralized Finance Be Used?

There are many ways that DeFi crypto is and could be used. One popular way that it is being used currently is with open lending protocols. While the name sounds complicated, open lending protocols essentially seek to eliminate the centralized middleman between lenders and borrowers.

buy cryptocurrencies without needing to be a financial expert is with SoFi Invest®.

SoFi Invest® empowers members to trade stocks, ETFs, and even cryptocurrency. SoFi’s crypto offerings currently include Bitcoin, Etherium, and Litecoin, and can be accessed directly in the SoFi app.

Easily add cryptocurrencies to your savings plan with SoFi Invest® along with traditional investments like stocks and ETFs. A separate cryptocurrency wallet, or even cryptocurrency experience, is not necessary before getting started.

Learn more about getting started with crypto using SoFi Invest®.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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The post A Beginner’s Guide to DeFi appeared first on SoFi.

Source: sofi.com

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