What in the world is DeFi?

Today’s episode will cover events happening the week ending September 11th, 2020. This week we’ll be talking about DeFi: An explanation of DeFi and a couple of compelling DeFi -related stories of the week, including a protocol bug that made a minimum wage worker a lot richer, and a major exchange ‘s attempt to compete with yield farming. More @ Talk.Bitcoin.Tax Full Show Notes: (00:27) This week we’ll be talking about DeFi: An explanation of DeFi and a couple of compelling DeFi -related stories of the week, including a protocol bug that made a minimum wage worker a lot richer, and a major exchange ‘s attempt to compete with yield farming. DeFi, or decentralized finance, is all the hype lately. The concept of decentralized finance is really at the core of cryptocurrency itself, but as traditional cryptocurrencies and blockchains became more adopted by the mainstream, they also became more regulated and centralized. This is arguably the nature of adoption – and by arguably, you can be sure there are crypto enthusiasts who will die on the hill of anti-centralization in cryptocurrency. So what is DeFi? Here’s a TLDR courtesy of a Coinbase blog post – and yes, the irony of utilizing a centralized exchange to explain decentralized finance is not lost here: “Cryptocurrency’s promise is to make money and payments universally accessible– to anyone, no matter where they are in the world. (DeFi)…takes that promise a step further. Imagine a global, open alternative to every financial service you use today — savings, loans, trading, insurance and more — accessible to anyone in the world with a smartphone and internet connection.” By using Decentralized Apps, aka “DAPPS” aka “D-apps”, smart contracts can be formed to essentially remove the centralized middlemen and custodians that are a part of traditional finance and traditional cryptocurrency exchange platforms. “At their core, the operations of these businesses are not managed by an institution and its employees — instead the rules are written in [smart contracts]. Once the smart contract is deployed to the blockchain, DeFi dapps can run themselves with little to no human intervention…The code is transparent on the blockchain for anyone to audit…Dapps are designed to be global from day one…anyone can create DeFi apps, and anyone can use them. Unlike finance today, there are no gatekeepers or accounts with lengthy forms.” DeFi, then, clearly is a response to a traditional financial system that is notoriously exclusionary. It speaks to the core nature of cryptocurrency, which in its relatively short existence, has become more centralized, and arguably, more exclusionary. KYC, or “Know Your Customer”, an anti-money laundering implementation, for example, is the norm with centralized exchanges, whereas traditional DeFi and Dapps aren’t typically beholden to this implementation. However, as with traditional crypto, as DeFi rapidly becomes more and more mainstream, we will likely see an increase of regulations. As an illustration of this point, Huobi, one of the largest cryptocurrency exchanges, has recently launched a crypto savings product to compete with the increasingly popular, and somewhat controversial, DeFi act of Yield Farming – according to Coindesk: “Despite lucrative returns from yield farming, white-hot DeFi has been criticized for potential security risks as more investors are putting money into unaudited smart contracts controlled by sometimes unknown founders. Nonetheless, the Seychelles-based crypto exchange did not hide its eagerness to participate in the DeFi world. Just on Aug. 23, Huobi launched a new token listing platform Huobi Inno Hub for DeFi tokens trading.”   This brings to light the other end of the DeFi double edged sword, so to speak. The lack of centralization, lack of custodian, and ease of entry allows anyone to participate, create applications, create cryptocurrencies, etc. This also means that protocols can be bugged,