What’s the Point of DeFi
TLDR:
The openness of DeFi enables new products that are simpler, faster, more secure, and more private.
DeFi already has some use-cases like borrowing against your bitcoin.
DeFi enables financial apps that offer cryptoeconomic and cryptographic guarantees.
Given that bitcoin has had no use-cases other than holding it and moving it around, it’s normal that bitcoiners ask what is the point of any other use-case, like decentralized finance (DeFi). Here’s my answer:
DeFi enables better products
Open, composable protocols means that there is no vendor lock-in and means that there is maximum optionality for the user. Imagine being able to use your favorite wallet with your favorite DEX.
DeFi is open by nature, which enables developers to build better apps permissionlessly. They don’t have to get permission from banks to build.
Simple
The regulatory guidelines in most countries means that DeFi apps don’t need to KYC their users. This enables a simpler and faster user-experience.
Secure
DeFi apps are trust-minimized and transparent. This means that there’s no one who can be malicious towards you and that you can verify yourself that the contracts you engage in will execute reliably. DeFi makes financial adjudication easier. DeFi apps can also be private.
DeFi already has some proven use-cases:
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.
Decentralized swaps between assets
Swapping using a decentralized exchange enables you to swap assets without giving unilateral control to any party, enables you to have cryptographic guarantees about price execution, and enables private swaps.
In general, there are a few types of security you can have when interacting with any system:
cryptographic: you have mathematical guarantees that the system can’t turn against you.
cryptoeconomic: there is some economic incentive, enforced by cryptographic, to prevent the system from turning against you.
economic: there is some economic incentive to prevent the system from turning against you.
legal: if the system turns against you, there will be legal backlash towards that system.
reputational: the system won’t turn against you because doing so would hurt its reputation.
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.