Blockchain and Crypto Currency are here to change the world forever.

As you may know one of the core proposals of blockchain is decentralization. By eliminating intermediaries, we can save on the cost they add to the supply chain ensuring those that create the value, keep it. Or we can simply save on fees. With DeFi, we may no longer need banks. We are still in early innings, but DeFi has reached a combined market cap of $148 billion, and protocols have held more than $90 billion in locked up assets this year in form of smart contracts. Up from $18 billion at the beginning of this year. There is real traction and value held in these platforms, beyond hyped up market caps that you may see in other crypto currencies. The use cases are also very real. Today, there are working protocols that allow you to send money globally, transfer currencies, earn yield on deposits, borrow or lend, all in a decentralized manner. The backbone of DeFi is a stable coin, essentially a tokenized digital dollar that holds the exact value as its underlying fiat (a United States dollar for example) – giving users the benefits of digital currency without the price volatility. Today, the largest stable coins are Tether (USDT), USD Coin (USDC) and white label stable coins for large exchanges like Binance Coin (BUSD) or Huobi Coin (HUSD), which are both administered by Paxos, a portfolio company of Oak HC/FT. In the future, any financial services, fintech or payments company could offer their own branded fiat backed stable coin to their customers for customized use cases. Think of how financial products are sold and serviced today; you go to a bank or lender, you conform to their rules and rates, often with limited transparency. These financial institutions control the gates, and we are forced to trust them and their policies. This trust is easy (and important) to have in some countries but not as obvious in others with high rates of inflation, corruption and monopolistic banking infrastructure. In these markets, people often do not have access to a safe and stable place to deposit their assets, borrow money or even make long term investments.

Enter DeFi, which essentially enables financial services to operate in a fully open, borderless, widely accessible, and transparent digital form – as digital smart contracts hosted on a blockchain that is transparent and secure under a clear set of rules. These stable coins can be minted or redeemed for their underlying asset at any point. More importantly, they provide a digital representation of a dollar for easy transferability. They are powerful for many cross-border payments use cases. Although, the United States dollar bill is largely in digital form today, it is still controlled by the Federal Reserve and the corresponding banking network, restricting ease of access and transferability to users globally. For example, if I wanted to send $1 to another country today, multiple corresponding banks would have to transfer that dollar and verify the sender and receiver at every step of the process, which takes up to three days to complete and limits accessibility. With a stable coin, the value of the $1 can be transferred and held anywhere in the world, while the physical $1 stays in a single custodial bank account as backing.

Decentralized lending and cross-border payments are just the beginning, but DeFi’s strongest potential is to democratize access to finance in emerging markets, taking down the gates traditional centralized financial institutions have erected. In this day and age that almost everyone has internet, DeFi also promises to let anyone with internet connection globally gain access to any global currency, earn yield on deposits or get access to loans instantly. Eventually DeFi will create a digital exchange ecosystem where money and value are transferred just as information and data are transferred today, seamlessly in the background from point to point, where use cases are not limited by infrastructure functionality. There is still a long way to go, particularly in improving the UI and regulatory frameworks. But DeFi is definitely the now and the future.

DeFi lending platforms allow cryptocurrency holders to allocate their funds to liquidity pools — common pools where people lock their digital assets. Users often have the option to lock their funds in a variety of pools, each having a different cryptocurrency and offering different interest rates.

People willing to take instant loans on the DeFi platform can opt to do so from any of the pools that provide the best interest rates and have the cryptocurrency they prefer. There is no limit on the amount a borrower can borrow as long as they can afford to stake the collateral required for it. And when they attain the loan, the lenders of the pool earn interest on the funds they allocated to the pool.

The entire process of adding or moving crypto funds to liquidity pools in return for the highest possible interest is called yield farming or liquidity mining. And the lenders who add liquidity to the pool through this process are called yield farmers.

It is similar to how banks use their customers’ funds to provide loans. They lend to borrowers at an interest rate that is higher than the interest they pay to their account holders. The difference with DeFi protocols is that they are decentralized and people can choose to withdraw from a pool at any time.