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Demystifying DeFi

HOSTS Blake Cassidy, Craig Jackson & Tracey Plowman|29 November, 2021

Sponsored by Bamboo

You may have heard of ‘Decentralized Finance’ in the cryptosphere, in this episode we cover off the basics of DeFi, what it is and why it’s seen by many as the ‘future of finance’. We go through the foundations of DeFi, lending/borrowing and decentralized exchanges.

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In the spirit of reconciliation, Equity Mates Media and the hosts of Crypto Curious acknowledge the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respects to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people today. 

Tracey: [00:00:21] Welcome to the crypto curious podcast designed to help you navigate the dynamic world of cryptocurrency. Hello, my name's Tracey, and I'm joined by my pals, Blake and Craig. How are you going, guys? [00:00:31][10.2]

Blake: [00:00:32] Good, thanks. Tracey, it's great to be back again. [00:00:33][1.6]

Tracey: [00:00:34] Good. [00:00:34][0.0]

Tracey: [00:00:35] See, look, it's another week and we've got another acronym. Today's podcast. We're going to talk to you about DeFi or decentralised finance without realising it. Now, this is probably one of the most important aspects of your crypto journey. In this episode, we go over what DeFi is, learn about its technical foundations and talk about how it actually works. We'll also be referencing a bit of information that we Covid off in previous episodes, especially points Covid in the Ethereum episode. So if you've not listened to that one, it might be worth going back to do some prep work. So what is DeFi or decentralised finance? To understand this, it's best to first understand and compare this with centralised finance. Blake, do you want to kick off and explain this concept? [00:01:22][47.8]

Blake: [00:01:23] Yeah, of course, Tracey. So centralised finance of the is the type of finance that we interface with every day when we're using a bank or a financial institution or someone to transfer money like transfer wise or what's another one Visa or MasterCard. And these are all centralised authorities that sit in the middle of transactions, and they're the trust in the system. They're the ones that validate our transactions. And therefore, with the advent of DeFi, we've had to call the legacy financial system Sankin. And now it's referred to as sci fi [00:02:05][41.8]

Craig: [00:02:05] DeFi response to some of the fundamental issues in Saffire decentralised finance. These issues being slow, clunky heaps of middlemen, which is prime for corruption phase and customers not getting the best deal and also with saved by more than half of the world's population, don't have access to centralised finance like banks. So the decentralised finance world is all about sort of inclusivity and bringing banking protocols to the masses. [00:02:37][31.8]

Blake: [00:02:38] I might actually elaborate on some of that Craig with in relation to it being slow. You know, my personal experience is that, you know, when you try to send funds from Australia to Europe, it can take days or weeks. But with, you know, decentralised systems, it can take seconds. As well as that, some of the banks here in Australia have tens of thousands or hundreds of thousands of employees that all need to be paid in a financial system, whereas that's what makes it expensive and slow as well. And the fees resulting from all of our transactions and the services that they provide have to go to paying all these staff members. [00:03:16][37.9]

Tracey: [00:03:17] So the word DeFi has started to be used as a sort of movement towards a low cost, fast, efficient, trustworthy and transparent ecosystem. This ecosystem operates without any central authority and can be accessible to anyone around the world who holds a smartphone or a computer and has an internet connexion. So you can see why DeFi has been seeping out from the crypto bubble to the mainstream media over the past 12 months. This is game changing. [00:03:45][28.5]

Craig: [00:03:46] Talk a little bit about the underlying technology of the DeFi system. The foundation of DeFi is the blockchain, so traditional markets? Sorry. Traditionally, you have bankers, accountants and governments that have been in charge of these financial systems. However, with DeFi, the entire system can be run from code. [00:04:03][17.7]

Tracey: [00:04:05] And just remember that this code is a critical part of this journey with already taking you through what blockchain is in previous episodes and we've touched on the three important pillars of the blockchain decentralisation, transparency and immutability. But these are so critical to this DeFi story that'll get Blake to talk you through their importance one more time. [00:04:24][18.9]

Blake: [00:04:25] Yeah, sure, Tracy, let's just do a quick refresh. So in relation to decentralisation, the blockchain is not in one physical location. It's running on thousands of computers at the same time, and this is different to banks and companies like PayPal. So, yeah, in relation to transparency, we can see all the transactions moving across the blockchain at any one time. And in this sense, it's really a public ledger and we don't know who's sending them, but we can see that the transactions are being sent and that they're being validated. And in relation to immutability, the data can't be changed once a transaction goes into one of the blocks and it's recorded on the blockchain. It uses some fancy mathematics to make sure that it can never be altered, and in this sense, it creates a really unique environment for people to to do business on with. His three key attributes ensure [00:05:22][57.6]

Tracey: [00:05:23] the three pillars of blockchain technology make it so that once new data is verified, it's an modifiable. It's distributed across the blockchain around the world, so it can't be destroyed or no one person or group controls the data. It's totally transparent. We've previously spoken about Bitcoin and Ethereum being the use cases for blockchain technology, both with different purposes. Bitcoin is a digital currency that people can use as a form of payment or hold is a store of value. While the Etherium is programmable and people can build software products and services, [00:05:58][34.9]

Craig: [00:05:59] and due to the decentralised properties of the blockchain, the software that people can build on top of it are called decentralised applications. Now we spoke a bit about this in the Ethereum episode, where programmers and coders can build DApps on top of Ethereum. And this was what really started the DeFi story back in late 2018. And back then, Ethereum was the main place for these DApps and DeFi as a whole. But now there's other places and platforms you can go like. Can you give us a bit of a run through about how the ecosystem has grown since then? [00:06:32][33.0]

Blake: [00:06:32] Yeah, of course. Everyone has their own version of Utopia, and many people have been trying to basically replicate and improve on the Ethereum blockchain. And I think we gave an example in one of the other episodes that says Ethereum's very much like New York City, and that's the place to do business. It's super busy. It's super expensive. So other people have built other blockchains to do things more freely. And an example of this is the salon of blockchain. And that's great for gaming because it goes super quick and allows people to do all the things that they want to do in a, you know, low latency environment. [00:07:08][36.2]

Craig: [00:07:09] Yeah, as you know, New York is one of the biggest cities in the world. So there's traffic, there's people everywhere, and it's a great way to do business. Now, since Etherium was sort of the start of DeFi, a lot of these platforms called layer 2s have now started to try to optimise Ethereum to best suit DeFi. So these layered tools are called Polygon Avalanche, and they're pretty much a software, a blockchain software that figures out how to optimise gas fees, optimise speed. And these layer two is we like to call that the skyscrapers of New York. They have plenty of businesses, plenty of customers, and it's really interesting to see how it's all going to pan out. [00:07:49][40.2]

Tracey: [00:07:50] OK, that's a great analogy. So I might be up next. Let's talk about how these, you know, platforms or cities, as have you've called them, actually run. But first, let's have a word from our sponsors. Welcome back to crypto curious. So the Deep Dive movement aims to transform the current financial system into a more transparent and trustworthy system like Blake described in the blockchain section earlier. And if these platforms like Ethereum and Solana and Cosmos are not run by a central entity or person, then how do they run? [00:08:22][32.4]

Blake: [00:08:24] That's a really good question, Tracy. And let's try not demystified a little bit. These pieces occurred. These blockchains and these systems are run by foundations and they are, you know, foundations that are often incorporated in, you know, any particular country, but sometimes they're not incorporated at all. And these foundations support the research and development of these platforms, and they're very much community orientated. They're very democratic in nature. And often those people that are building these systems vote towards each other's projects. And they're the they're the next things that are built and improved on these platforms. [00:09:06][41.6]

Craig: [00:09:07] And these foundations create the perfect, trustworthy environment to build and execute smart contracts. Now, smart contracts dictate the terms of a contract and control the execution of a contract. It's a little bit hard to understand, so I might give it to you, Blake. Is you probably the best person to give us an overview of what a smart contract is and how it actually works [00:09:27][20.0]

Blake: [00:09:28] is basically a piece of code that runs on top of these blockchains and executes particular terms. An example of a term is that, you know, I argue money on a particular date and the smart contract would then execute and then send the money from me to you. And that's really in its simplest forms, but it eliminates any need for a central authority to manage the transaction, whereas self-executing because the code does it once it reaches, you know, midnight, for example, on a particular night, it automatically sends it. And we don't need to rely upon anyone or, you know, have to pay anyone or, you know, no one's taking a cut between that transaction. [00:10:06][38.4]

Craig: [00:10:07] I think a really good example of a smart contract, especially in DeFi now, is, you know, there's a lot of we'll get into it soon, but lending and borrowing. Now, if you're to lend and borrow from a traditional neo bank or a normal bank, obviously it takes paperwork. You need to talk to someone they have to understand. You can pay it back. Now with day four, you're able just to put a bitcoin or half a bitcoin up and you can get your loan that way. So that's an example of a smart contract that can be done by you and the blockchain and no other intermediary. [00:10:41][33.6]

Tracey: [00:10:42] And that's a great example of one use case in DeFi, and we've covered Deffeyes Blockchain Foundation and ecosystems, such as a theorem that they live on. And now let's look at the components that actually make up defied the framework. [00:10:55][13.1]

Blake: [00:10:56] So DeFi has innovated in some really key areas that will cover off on, and we'll just touch on the main ones. But there are many others. First of all, are exchanges, decentralised exchanges. And this allows people to trade with one another, but without any intermediaries. The second one that we're going to cover up on is lending and borrowing in the same way that you deposit money into the bank and the bank lensed your deposits out to generate an interest rate. You can do the same thing in DeFi. And on the flip side, you can also borrow money through these platforms like you can through a bank, but there's no bank, and there's also something called stablecoins. And we touched on them earlier where, you know, there one digital representation of a U.S. dollar that can be used and sent around the world on a blockchain. And there's some really interesting variations of these that have been developed in the DeFi space. There's many others that we won't touch on now, but I will just highlight them, such as your digital insurance, Synthetix and derivatives and liquidity pools, [00:12:01][65.1]

Tracey: [00:12:01] the like, Blake said. Let's just cover off the main ones today, and let's start with exchanges. Blake, do you want to explain a little bit further there? [00:12:07][6.0]

Blake: [00:12:08] Decentralised exchanges have really come a long way in the last couple of years, and now, you know, just as many people use decentralised exchanges as centralised exchanges kind of like Coinbase. But decentralised exchanges have really innovated over the last couple of years and grown in popularity. Now, a lot of the trade volume that happens in the crypto ecosystem happens on decentralised exchanges, and the innovation is really around the user experience and that is, you know, the ability to get liquidity there as well as on centralised exchanges. Craig, do you wanna maybe talk about a couple of the platforms that you've used and how maybe they differ to some of the centralised platforms? [00:12:52][43.8]

Craig: [00:12:53] Yeah, we touched on decentralised exchanges in the last exchanges episode. If you want to go back and have a listen to that. And you know. So we spoke about centralised exchanges, you need to sort of give your licence, prove that you are a legit person and you're really bound by those exchanges, coins and the choices that they have, whereas these decentralised exchanges like Uniswap or SushiSwap are really popular because all you need is a Ethereum wallet and you are able to trade any token which exists on those platforms. So there's no need for verification and the user experience. As you mentioned, Blake has, as you know, it's gone late leaps and bounds to what it was three or four years ago. You know, as we say, Uniswap volume overtook Coinbase, I think, a few months ago, and Uniswap has less than 20 employees when Coinbase has a couple of hundred. So that's sort of an example of the power of decentralised exchanges. [00:13:51][58.2]

Tracey: [00:13:52] Okay, thanks, guys. So these are more efficient. There's a lot more choice, and there's obviously some cool names out there. We've got Uniswap, SushiSwap. I think we've got Kyber Kyber Pancake. There's a pancake in there. [00:14:03][11.2]

Craig: [00:14:03] PancakeSwap. Yeah. [00:14:04][1.0]

Tracey: [00:14:06] Let's move on to lending and borrowing. Like, do you want to give us some details there? [00:14:10][4.0]

Blake: [00:14:11] Yeah, of course. And this is fascinating this area and in the same way that you can lend money through your bank to others. For example, when you deposit your money to a bank, you know, often the banks lending it out for mortgages to buy homes. And you can also get a mortgage through your bank. But now, you know, with these decentralised platforms, we don't necessarily need to rely upon the bank. We can go and borrow and lend ourselves, and the rates are pretty good, maybe even better than you would get at the bank. And these platforms have grown massively in popularity. Now, some of these platforms have hundreds of billions of dollars of your assets to lend and, you know, allow people to to borrow as much as much as they can. So, yeah. Craig, maybe you want to touch on a couple of the platforms. [00:15:02][50.7]

Craig: [00:15:02] So are they in compound where the real DeFi darlings when DeFi first kicked off a few years ago? And these platforms really make it possible for you to leverage your existing holdings and borrow against them. And this is a really interesting concept because you can say if you have one Ethereum, you can park that on the platform and you can borrow maybe 20 percent of that. Of course you have to. If you don't pay it back, you can get liquidated and there's always certain rules around it. But this is an example of, you know, borrow assets in a lot easier way on the crypto ecosystem. [00:15:36][34.0]

Blake: [00:15:37] I think this really comes back to being your own bank, you know, and managing your own risk, right? So you can deposit, you know, one of the Ethereum. And yet there's additional risk because you have to manage your repayments and your liquidation price, and you don't have to do that with a bank. You outsource that to the bankers. Right. But with these protocols, you really have to do it yourself. So there is additional risk, but there is a petition or flexibility, and the fees are often a lot less. It's a lot quicker and you don't need to ask anyone's permission. [00:16:09][32.1]

Tracey: [00:16:10] Yeah, thanks, guys. And lending and borrowing is one of the fastest growing aspects of this entire DeFi community, and that's because there is such a big call call for this in general. So let's move on to stablecoins now, Blake, do you want to do you want to give us a rundown there? [00:16:24][14.1]

Blake: [00:16:24] We discussed stablecoins in a general sense, where there's one digital token for your one USD coin that's in the bank in there. The token is really a digital representation of that USD coin or IUD coin in the bank. And there's also decentralised versions of this, where there's actually not a coin in the bank and they call these algorithmic stablecoins. And that's because it relies upon algorithms. And instead of it being backed on the basis of a US dollar, it can be backed with Ethereum or bitcoin. And the way that it works is that you can deposit your bitcoin and it'll issue you these algorithmic stablecoins, and then you can use those stablecoins for whatever you like in the ecosystem, whatever utility they have, and then you can return them for the original bitcoin that you locked up. And this was a big innovation in the space because, you know, it allows the ecosystem to run without being attached to basically the real world. It can run in a fully decentralised fashion. [00:17:31][66.7]

Craig: [00:17:32] Yeah, the algorithmic stablecoins, I think the biggest ones dao right? Or die. How does that work? Like, say, if, say, if bitcoin ethereum price goes down, do they lose the stablecoin peg? Like, how is that maintained? [00:17:45][13.6]

Blake: [00:17:46] Good question. So there's a few ways that these algorithmic stablecoins keep their peg. Firstly, they're over collateralised, which means that for every, you know, say, one dollar that you lock up in bitcoin, you can only create. Thirty cents in these algorithmic stablecoins. And that's because these assets are very volatile. The reason that they do this is because if bitcoin price goes down, they want to ensure that the stablecoin is always fully backed. Now the second part of that is that they can create and destroy Dai, which is the stablecoin at any given time in order to make sure that every single DAI is backed by bitcoin or a theme or whatever, it's collateralised by. And this is all automated through the smart contracts that they've developed. [00:18:39][53.1]

Tracey: [00:18:40] Well, that was really fascinating. Like, I think I actually just kind of pegged a few things together. Then that was that was great. Look, we've just gone through the exchanges, the lending, the borrowing in the stablecoins, and they actually all work together. So does does someone want to give me an example of how you can do that? [00:18:57][16.4]

Blake: [00:18:57] Yeah, I might give an example how we can use all these things together. Now, if I have, you know, one of Theorem, I can create some stablecoins, some Dai with some of my theorem and then I can go and trade that for a different stablecoin. For example, USDC stablecoin on one of these decentralised exchanges. Then with that, I can go lend it out. And you know, from that one trade, I can generate an interest rate on USDC. But, you know, while still having exposure to my theorem, that's been locked up. And in this sense, you know, all these elements of the industry complement one another. [00:19:34][36.6]

Tracey: [00:19:34] Thanks, Blake. And remember, this will take you some time to get your head around these concepts. If you need to feel free to send us an email, we'd be happy to reply. All of these components are working together to build the backbone of the world's new decentralised financial system. How has this innovated so quickly? [00:19:53][19.1]

Blake: [00:19:54] Um yeah, I think the main reason for that is because everything's being built, open sourced. So these, you know, for example, decentralised exchanges, the code base is all there where anybody can copy it and make their own decentralised exchange and they can improve on it. And in this sense, any problems that have been solved once don't need to be solved again. And this is very different to the traditional sectors where your people are solving and innovating in their own silos, in their own companies and not necessarily sharing the fruits of their work. And another aspect of this of why it's you're innovating so quickly is because it's unregulated. So it's allowing people to experiment with new economic models at a speed that has never happened before, and this is allowing people to innovate rapidly and try new things. [00:20:48][54.1]

Craig: [00:20:49] Yeah, in a nutshell, that gives an overview of DeFi. And you know, as Blake mentioned, all these things really create a limitless potential for what could be the new global financial system. It's pretty exciting. [00:21:01][11.7]

Tracey: [00:21:02] Yeah. So how do we round out this episode? Craig, you know, what do you think the future holds? What will we be doing one day? Will we be our own banks? [00:21:10][8.0]

Craig: [00:21:11] It's all really exciting as a crypto investor, but also as a crypto user. I think one thing that sticks out to me is stablecoin peer to peer lending, where, you know, this is almost like another form of saving another form of income. And, you know, being your own bank, being your own lender, where instead of saving your, you know, a couple of hundred dollars a week into your savings account and getting, you know, zero point eight percent back from your bank, you can now start to build a, you know, attractive savings plan where you're actually saving your money in stablecoins, lending it out on these DeFi protocols for, you know, eight to 12 percent per year, which is, you know, that's a really big improvement of what we see in traditional finance. So yeah, it's super exciting. And yeah, there's a lot to take in. [00:21:57][46.2]

Tracey: [00:21:57] So today's episode was a bit of a heavy one, but it's one that we've really loved because it's getting down to what crypto was all about. Satoshi and his cypherpunks, you know, they developed this system and the foundations for building what we're building here today with what DeFi is all about. So let's leave it there for today, but we want to know what you want to know about crypto, specifically any questions about our podcast today. So send us an email at podcast it get bamboo dot IO or follow us on social media. All those details are in the show notes below, and don't forget to write and review us in your podcast app. And that's it for this episode of crypto. Curious? Thanks again for joining us. [00:22:37][39.6]

Craig: [00:22:38] Thanks. Until next time. [00:22:39][1.2]

Craig: [00:22:39] See you later! [00:22:40][0.3]

[1303.8]

More About

Meet your hosts

  • Blake Cassidy

    Blake Cassidy

    Blake has a passion for technology and fell down the crypto rabbit hole while studying in Europe in 2015. He then started trading Bitcoins while living in China in 2015 and ever since then has been immersed in the sector. Blake is now the CEO of Bamboo which helps people take their first step into crypto currencies.
  • Craig Jackson

    Craig Jackson

    Craig developed an interest in crypto after hearing about Bitcoin at soccer training in 2017. Since going down the rabbit hole, Craig has endured the ups and downs of crypto, now working in fintech as the Growth Lead at Blossom. Craig enjoys learning about the upcoming innovations in the space and is keen to share them with the Crypto Curious.
  • Tracey Plowman

    Tracey Plowman

    Chief Operations Officer for cutting-edge cryptocurrency app, Bamboo; Tracey Plowman is among just a handful of women taking on executive roles in the digital assets space. Tracey is extremely motivated to encourage more women into technology and believes this can help to empower their investment choices and establish financial freedom. Tracey’s interest in cryptocurrencies was sparked, while working as operations manager for a digital investment fund. This fostered her passion for cryptocurrencies and trading in this new asset class.

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