What is Ethereum?
Where I compare the international banking system to a post-it note (2min read)
I'm trying something new this month. We're going to dig into Decentralized Finance - known as DeFi. Instead of one long post, I'll send multiple short posts to cover Ethereum, Digital Wallets, Stablecoins, Borrowing & Lending, and Exchanges & Swaps. Give feedback via comments or Twitter @juliannebrands
What is DeFi:
Think of all of the ways you interact with money. In regular old finance, banks make all of this happen.
Send money on Venmo?
Pay credit card bill?
Write rent checks?
Banks verify who are you and move and hold money on your behalf. Banks are the trusted middle man for money. Decentralized finance (DeFi) is rebuilding finance with blockchains not banks.
How Does It Work:
DeFi uses a blockchain called Ethereum. The blockchain - a network of computers - acts as the trusted intermediary to verify and track transactions. You pay a small fee in the cryptocurrency Ether (ETH) to use this trusted middle man. Just like Bitcoin and other cryptocurrencies, there's a set number of ETH in existence in order to hold its value. There's one key difference between Ethereum and other common blockchains. This difference makes it perfect for building decentralized finance. With Ethereum, you can give money instructions.
Right now, I'm spending time at my parents home. My mom leaves me chores on post-it notes around the house.
"Annie - Here's $20, please pick up avocados on your way home if they are on sale. Love, Mama J"
This is how I think about Ethereum - like a dollar bill with a post-it note attached. You give money instructions (called smart contracts) for tasks normally reserved for banks. The smart contract does the job you tell it to. The blockchain verifies and transacts. And that's it.
Why Does DeFi matter?
The ability to give money instructions allows us to build the functionality of our existing banking system on top of Ethereum. DeFi projects are still playing catch up to the existing banking system. Current projects mostly replicate existing financial services. With a 100 year head start, it makes sense.
The global financial system has some much needed competition. To help make financial services better for everyone. Prices may go down. Products can improve. We all have the chance to invest in this burgeoning financial system.
For example. You can buy the cryptocurrency ETH. If more people use Ethereum, that usage helps increase the value of your currency. Some people call blockchains the native business model of the internet.
With decentralized finance, its easy to see why.
Additional Resources:
Paul Krugman: The Greenback Rules. So What?
Fred Wilson: Scaling Ethereum