(rock music)
- Hi, welcome to another Coffee with Bruce.
So, today, we're going to talk about
decentralized finance, or DeFi
which is a really interesting class
of applications that are emerging on top of blockchain.
Apparently, not interesting to cats...
and hopefully, you know a little bit about blockchains,
if not, there's a video that I did about them earlier,
but really all you need to know
for the purposes of this discussion
is that a blockchain is a distributed ledger
where we can record transactions in a distributed way.
And you probably know that blockchains
are often associated with cryptocurrencies.
Some of those are sort of native to the blockchain.
So, for example, the Bitcoin blockchain
has its own built in currency, Bitcoin,
but people have also invented new currencies
that run on top of existing blockchains.
You may have even heard of things
like CryptoKitties, which are an early form
of token built on top of a blockchain.
People keep on coming up with all kinds
of new coins and tokens. You've probably heard
recently about non-fungible tokens,
which are maybe a little bit more
like baseball trading cards and compare
to fungible tokens, which, for example,
a coin is an example of a traditional thing,
which is fungible, one coin being
pretty much the same as another coin,
and you can swap them and, you know,
you don't really care which one you have,
whereas, with non-fungible tokens,
there's more a sense of uniqueness.
But all of these things are classes
of assets and people buy and sell them.
And, of course, if people are buying
and selling things, that creates marketplaces.
Now, decentralized finance is the idea
that we can build these marketplaces
in a totally decentralized way,
which contrasts with traditional ways
for buying and selling stuff where we often go
through a central party. So if you think
about how would you go and buy a stock today,
you would typically go to your stockbroker
and say "I would like to buy some shares
of this particular stock, and I'm willing
to pay this price." And the stockbroker looks
for somebody who's willing to sell at that price,
matches the buy order to the sell order,
and processes the transaction.
So the interesting thing about decentralized finance
is you can do exactly what I just described,
except you do it without the stockbroker in the middle.
Instead, it's done through code,
and the key innovation that enables this
is the idea that code can run on the blockchain.
We have these things called smart contracts.
So with your smart contract, you can say
I would like to buy asset, X, and I'm willing
to pay a particular price, Y,
and if the conditions emerge where
that asset's available at that price,
your transaction is executed automatically,
and then, the result of that transaction
is written into the blockchain.
So, now you'll see the ownership
of the asset is transferred from one person to another,
and whatever currency or coin or token
you were using to buy that asset,
it's now transferred from the buyer to the seller.
All of this is done by a piece
of code completely automatically.
That is the essence of a smart contract.
And one of the interesting things
about them is you push these contracts out,
and they are visible to anybody who's on the blockchain,
and you can see them in advance,
and you can actually verify that they're correct,
or at least that's the hope.
Of course, occasionally software has bugs,
and so that's actually an ongoing area of research
to make sure that contracts are correct,
but this is definitely creating
really interesting opportunities.
And, at the moment that is now
a multi-billion dollar business.
The DeFi business is really generating a lot of interest
because it creates opportunities to do things
in a way that it hasn't been done before.
So that is the essence of decentralized finance.
It's replacing all of these things
that were previously very centralized,
like exchanges, with distributed code.
And, of course the claims about this
are perhaps somewhat over-heated,
but one of the claims would be
that you can get better security
by not having so much trust in a central party.
So there were a few other challenges,
like the fact that, you know,
the timeliness of these transactions is really important.
That's true in traditional finance as well.
And blockchains today are actually not that great
for doing timely transaction processing.
And so that's actually another really interesting area.
And we'll probably talk about that in a future video.
But anyway, for now, hopefully that gave you
a quick idea of what decentralized finance is all about.
And I'm sure we'll talk about it
again on another Coffee with Bruce.
(machine whirs)
Perfect.