What Is Decentralized Finance? And Why Is It Important

Many experts believe the world would be a better place if money was decentralized, and that’s exactly what we’re seeing with most cryptocurrencies (crypto).

Using cryptocurrencies like Bitcoin, Etherium, etc. removes the need to depend on a single party, bank, government in other to send or receive money. It’s completely done on a peer-to-peer network i.e. people send money directly without the middleman, thus removing commissions and reducing transaction costs.

The technology that makes this possible is called the blockchain, and the first use case was in Bitcoin(the first mainstream cryptocurrency).

In the real sense, there are numerous other use cases of Crypto in Finance aside from sending and receiving money. And that’s where Decentralized Finance(DeFi) comes into place. Such other application of blockchain in financial transaction includes lending, saving, staking, prediction market, etc.

An even broader definition of DeFi is the one given by Blocknomi, which states that “DeFi is essentially just conventional financial tools built on a blockchain — specifically Ethereum.” 

I believe this is revolutionary and a completely new way of doing things. It’s so important because it helps to bank the unbanked(over 3 billion people in the world), create a fair playing ground, and reduce costs in banking operations.

3 Reasons Why DeFi Is So Important

  1. DeFi helps to Bank the Unbanked: Decentralized finance is getting more and more people across the world to connect to the global market. The over 3 billion unbanked population in the world(majorly Africans and Asians) can now receive quality and competitive financial services without living in their country.   This is more like open finance where you can connect yourself to the global economy.You see, I always say this; you don’t need to explain  Bitcoin to a native of Argentina, Venezuela or Zimbabwe. They just understand it naturally because it’s one of the few means of hedging against the hyperinflation in their native fiat currency.
  2. Defi recreates a fair playing ground for Financial Transactions: The majority of activities that are been carried out by banks are now been done on DeFi platforms in a more cheaper and transparent way. For instance in Nigeria, the dollar($) has two official rates N315 & N365. While the former rate is the one enforced by the Central Bank of Nigeria (CBN), the latter is the official rate used in the global market. Receiving $1000 through banks gives you N315,000, whereas doing the same on the DeFi platform that offers remittance gives you N365,000.That’s a whooping N50,000 extra saving, which would have been lost if you had used the local banks.
  3. DeFi reduces cost in banking operations: Basically, DeFi platforms that offer lending,  saving, and similar banking services do it far cheaper than banks. And this is mainly as a result of such platforms not requiring large physical infrastructures as a bank does. Most DeFi operations can be run from an online application and a head office.A good example of such DeFi App which I have used is Celcius Network. The platform allows you to save money and receive up to 10% Average Percentage Return(APR) or Borrow a loan and pay as low as 4% average interest. From my research so far, only a few banks can offer such a low rate in Nigeria. The yearly average return on savings in Nigeria is less than 3%, and loans on the other side accrue up to 25% yearly interest.

This is what Defi Looks Like Today

Source: https://www.theblockcrypto.com/2018/10/12/mapping-out-ethereums-open-finance/


To round it up, DeFi platforms are making banking cheaper, easier, and more accessible to the world, and I must say that this is just the beginning.  A lot of new features and killer apps will be built in the DeFi ecosystem this current decade. And many of such tools and apps will compete directly with services being offered by banks.

Who will win eventually? Banks or Defi.

I will say let the time come, but I’m so certain most banks have started seeing their profit reduce right before their own eyes.

If you would be interested in saving or borrowing a loan, you should try out this DeFi App called Celcius Network.

Also, if you want to buy cryptocurrency in Nigeria, you can checkout exchanges like Binance, LUNO, and Paxful.  These exchanges are the most reliable at the time of writing this article. You must do your own research before registering and using any crypto exchange.

Have any questions? Do use the comments below.

Digital Asset Advocate | Financial Market & Web3 Explorer | +234 810 185 0909


Please enter your comment!
Please enter your name here