DeFi Explained To Your Grandma

DeFi Explained To Your Grandma

Ben Knaus

Ben Knaus

MELD Ambassador

March 8, 2022

Someone once said that if you can explain the most complex concepts to a 6-year-old child, if that child can then explain it to their peers, and both of them have understood it, it means you’ve understood the concept perfectly.

Well, it’s the same with our grannies as well. 

In the current scenario of finance, blockchain and DeFi are being talked about everywhere. The industry boomed post the pandemic, and it is showing no signs of slowing down with new and innovative projects being developed by numerous players in the field.

So in times like these, chances are your grandma may have heard of crypto and DeFi. And if she has she’s probably reached out to you since she knows you’re into magic crypto internet money.

Well, don’t worry, if she has I’ve got your back. Let’s explain DeFi in the same way she taught you the story of “The Boy who cried Wolf” in the simplest of terms, and this might be a bit far-fetched, but you can even convince her to enter the world of DeFi.

So, let’s jump right in and introduce the world of DeFi to your grandma. 

What Is DeFi?

Alright, grandma, so in your time, there used to be services such as the banks and physical stock markets to perform operations such as depositing your earnings in a bank account for interest, borrowing loans, or investing in stocks of different kinds of companies, and so on.

Any kind of money was in the form of notes and coins. If you pay someone an amount or you receive some amount, the bank would have a record of it. Likewise, any kind of stock you traded, the stock exchange made a record of it. Everything was monitored by the people behind the banks and exchanges.

Now, what if the money wasn’t in the form of notes and coins? What if the banks and exchanges were not a physical place but like an app?

Alright, alright, let’s take it one step at a time. 

Cryptocurrency

Think of cryptocurrency as money that is digital. It means there are no notes or coins, and you can find the money residing in an app on your phone - a digital wallet. I know you’re wondering where this money came from and how do we know if it’s there or not.

So that’s simple. Just like how the government prints money like notes and coins, people around the world create these digital currencies. You might have your dollars as physical money, but there are Bitcoins, Ethereum, and so many more in cryptocurrencies. In fact, there are more than 10,000 cryptocurrencies.

So these cryptocurrencies are not all made by one person or government. Instead, they are made by different people across the globe. These people decide the total amount of a cryptocurrency, like Bitcoin.

You can buy this Bitcoin with your dollars as well. I’ll tell you where you can do that shortly. So when you purchase these Bitcoins, they are stored in a digital wallet, an app on your phone. There are many kinds of digital wallets where you can keep your cryptocurrencies, and different people have built these wallets.

Now that you know this, DeFi mainly consists of two parts. There are more parts but for now, let’s cover the basics. They are bank services and exchanges.

Bank Services

So now, let’s say you’ve bought some cryptocurrencies. You have stored it in your wallet. Let’s say you want to earn interest on your cryptocurrencies. Earlier, you used to deposit money to the bank, but now you won’t have to.

All you’ll need to do is access a service through your mobile phone, which pays you interest for depositing the money. Then, connect your wallet to that service’s app or website, and transfer the cryptocurrency from the wallet to the service.

Banks usually have people monitor the amount you’ve deposited, calculate the interest amount, and add that much money to your account. But here, that’s all done automatically through something called smart contracts.

Remember when you connected your wallet to the service and deposited the money to it? All of that happened because of something called code. Your code is a few lines of text that make the app perform the functions you want.

Your smart contracts function the same way. They are a few lines of text which see that you’ve deposited a certain amount. Since they already know the interest rate, they calculate the time for which that amount was deposited and calculate your interest accordingly.

All of this is done in a matter of seconds because they’re much faster than humans.

Now you can apply this same logic to borrowing money or taking a loan, maybe even providing collateral for it. All of it happens through smart contracts.

Exchanges

Coming to the second part, which is the cryptocurrency exchanges. Remember earlier I said there are more than 10,000 cryptocurrencies around the globe? Well, in cryptocurrency exchanges, instead of people investing in the stocks of companies, people invest in cryptocurrencies.

These exchanges, too, are not physical and are in the form of apps and websites run via code. So, think of it this way. Every cryptocurrency’s value is associated with the value of your physical currency like US Dollars, Euros, etc.

For example, Bitcoin is a digital currency, and one Bitcoin right now is worth around 57,000 US Dollars. This value keeps changing depending on how many people are buying or selling the cryptocurrency, how many people are using it, what they’re using it for, etc.

People try to invest in these cryptocurrencies so that they can earn profits. It’s just like stock markets, but here, instead of companies, there are cryptocurrencies. 

We’re almost done— just one last thing. 

Decentralization

You have understood everything, but you’re still wondering why the entire system is called DeFi or Decentralized Finance.

So here’s the essential part.

In your days, every transaction you made and all the money you invested in the stock market was monitored by one bank owner, exchange authorities, and the government. This is a centralized system, where one set of people monitors and decides everything, and all the records of transactions are kept in one place or a few specific places.

With decentralized finance, it’s the exact opposite. No bank monitors your transactions or loans or earnings, and no governments are involved. Instead, all of this is controlled by the people who use the money itself.

So if you’re making any kind of transaction, all the records are not stored in one place but so many different places. These places are the computer systems of the people who are using these services themselves. So in a way, some of your transaction records will be stored in one system, while others in another system.

It is all scattered but connected. Here’s how. Every transaction has a unique number. This unique number also points to the unique number of the previous transaction. This way, even though the records are stored in different places, they’re all connected. This system is called the blockchain because every transaction is stored as a block of details, and when all the blocks are connected, they form a chain of blocks or blockchain.

Based on this system, all the services within DeFi function. 

Conclusion

So now that you know the world of DeFi, if you can imagine why so many people want to participate in it. I didn’t really explain it before but the typical DeFi yield is more than 100x what the good old bank pays in APY interest.

But more importantly, your money is yours alone. You can independently decide what to do with it, and there are no intermediaries trying to earn a commission off your hard-earned money.

Disclaimer

The opinions shared within this article are those solely of the MELD Ambassador. Note that the content within should not be considered financial, legal, or tax advice. Neither the author nor MELD Labs PTE Ltd. are financial, legal or tax advisors. None of this content should be used to make any form of financial, tax, or legal decisions. Do your own research and consult professionals as needed for official policies, restrictions, and requirements in your jurisdiction.

If you believe in the MELD vision, want to support this initiative, and want to help promote the future of finance then we want you to join the MELD Ambassador Program!

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