TLDR:

• The openness of DeFi enables new products that are simple, fast, private, and reliably secure.

• DeFi already has some use-cases like self-custodial, bitcoin-secured loans.

People often ask what is the point of decentralized finance (DeFi). Here’s my answer:

1. DeFi enables new and better products

   • Putting money on open, interoperable protocols that developers can build use permissionlessly accelerates innovation.

2. Simple

   • DeFi applications don’t need to KYC their users. This enables simpler and faster experiences.

3. Secure

   • DeFi apps execute reliably since their rules execute automatically, and generally, DeFi apps are trustless and private.

DeFi already has some proven use-cases:

1. Over-secured loans

   • Lava Loans for example enables you to borrow against your bitcoin without taking on counterparty risk. Taking on counterparty risk in bitcoin-secured loans has resulted in billions of losses in just the past few years.

2. Decentralized swaps between assets

   • Swapping using a decentralized exchange enables you to swap assets without giving unilateral control to your swap provider.

In general, there are a few types of security you can have when interacting with any system:

1. cryptographic: you have mathematical guarantees that the system can’t turn against you.

2. cryptoeconomic: there is some economic incentive, enforced by cryptographic, to prevent the system from turning against you.

3. economic: there is some economic incentive to prevent the system from turning against you.

4. legal: if the system turns against you, there will be legal backlash towards that system.

5. reputational: the system won’t turn against you because doing so would hurt its reputation.

6. moral: there are moral reasons why a system or group of actors won’t turn against you.

DeFi enables financial systems that have cryptoeconomic or even better cryptographic security guarantees.