Even if you have never heard of it, DeFi (for decentralised finance) is very much part of the world we live in. In short, decentralised finance uses new technologies like blockchain that avoids traditional financial intermediaries like brokerages, exchanges or banks to provide financial services. What are the benefits? Consumers and small businesses lose up to 3% of a transaction’s value when using a credit card. Remittance fees are up to 7%. It takes days to settle a transaction. DeFi can remove all of these inefficiencies.
But talking about DeFi almost requires learning a new language. A new paper by economists Campbell Harvey, Ashwin Ramachandran and Joey Santoro entitled “DeFi and the Future of Finance” provides a valuable synopsis of the building blocks of DeFi: blockchain, cryptocurrencies, smart contracts, oracles, stable coins and dApps. These tools allow for digital transactions, the use of fungible and nonfungible tokens (and the associated minting and burning of these coins), staking rewards, swaps, collateralised loans and flash loans.
To make sense of this, I asked Marius Reitz, general manager for Africa at Luno, a cryptocurrency platform, to begin by explaining cryptocurrencies. “Over the past thousands of years, the way the world thinks about and uses money has changed many times. These changes occur when three things happen: our collective mindset changes, there is consumer demand for it, and there is technology available to support this change.
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