UNDERSTANDING DEFIs and DAOs

Technology is sweeping the world in every aspect, from medicine, to trading, engineering, art, military, the list is endless. As humans there's a part of our everyday life we get most skeptical about, Our finances. Yes Tech has definitely cut across Finance majorly, and soon physical/centralized banks will be extinct. Therefore it is imminent we understand the intricacies involved in this new finance wave.

DEFi: short for Decentralized Finance, is a financial Technology (still forming), based on secure distributed ledgers like in Cryptocurrency, that is saying that no one entity, controls these ledgers, everybody is involved. DEFi cuts out the middle man/men, and links buyers to sellers, and vice versa directly, using smart contracts to verify transactions at both ends. This system totally removes the control, banks have on financial activities, products, service, and Money in general.

There are lots of Positive perks of DEFi against our traditional banking system

1. The general goal of the centralized banking is to make money. Say you need to get supplies from the mall. After slotting in your card to pay, these are the series of transactions that take place. a). the mall sends information to your bank for a debit, b). your bank receives this debit and processes your funds, whilst also enlisting the transaction to match the Central Bank policies, c). Upon completion, it sends approval to the mall, d). your transaction is confirmed and successful.

In this chain, the mall gets a cut(a fee) from that transaction, your bank gets a fee too, and so does the Central Bank.

This crowd of middle men is what DEFi looks to abolish. Now say you need $10, and I need supplies that you have. A simple transaction, I give you the $10, in exchange for your supplies, no charge, no delays, no fees, now that is exactly how DEFi works, it totally removes the middle Men.

1. With an Internet connection on, you can make transactions anywhere, anytime, and at your convenience.
2. Transaction Issues are limited, your balance is your balance, and transactions run and is completed in matter of seconds.

DEFi is composed of:

1.Stable Coins: These are digital tokens, designed to have same value as normal fiat currencies, example: 1 USDt is equivalent to 1 USD(United States Dollar), meaning 1USDt is exchangeable for one real USD.

2. Software (Swapping): This is the direct peer to peer swapping of currencies. Uniswap is one of such, where you can swap different currencies (crypto included) directly, and in matter of seconds.

3. Loan Protocols: An example of a Crypto-lending protocol is the Aave protocol. Borrowers can take loans without having hassles, using Crypto as collateral, and get credited in seconds. In cases of default, the Crypto collateral is sold off to cover the loan.

Although DEFi is still Upcoming, it is confidently the future of Finance. Infact as of October 2021, approximately $200bn of total asset value has been locked in DeFi protocols.

DAOs Short form for Decentralized Autonomous Organizations, is an Organization, constructed by rules, encoded as a computer program transparently controlled by its members, and not influenced by a central government. DAOs are member-owned communities, where everybody is a leader and a member, there is no centralized authority, or autonomy of power. These rules encoded and agreed by its members, are maintained on a blockchain, and they help track transactions, making forgery of transactions difficult by the use of timestamps, and distributed ledgers/database. DAOs aim to be open transparent platforms through which individuals control their assets, identities and their personal data.

You can become a member of a DAOs by acquiring it's governance token or NFTs. Examples of notable DAOs includes: Dash Steem Uniswap The DAO

On a different article we would discuss on how to get these governance tokens and NFTs, and what they are.