4What Is DeFi?
Decentralized finance, or DeFi, is currently one of the most important use cases of blockchain and it stands to change how we transact money. We only need look at the implosion of Celsius to see the challenges of CeFi, or centralized finance (instruments that are managed by a centralized company or bank). First, let's understand what DeFi is. DeFi contracts are smart contracts that reside on a blockchain. They are not controlled by any central entity and as such are much less prone, if not immune, to manipulation. The two best use cases for DeFi right now are collateralized lending and collateralized borrowing. Collateralized lending is the process whereby anyone can check in collateral in the form of a crypto asset and then generate interest by lending it out (which is, by the way, what banks do with your money when you're not using it). Collateralized borrowing, conversely, consists of you borrowing funds that are secured by your collateral in the smart contract. When your collateral is deposited, it's under certain rules and conditions that are agreed, upon including how interest will be calculated, how loan‐to‐value will be calculated, and so on. The contract then works, and the software guides it. Now, back to Celsius. Celsius was a company that allowed users to check in their crypto assets and allowed collateralized lending (borrowing additional monies using crypto as collateral) and yield farming (lending assets to others and earning interest). All of ...
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