As the Blockchain garners more attention and adoption, people are faced with new terminology. Words like DeFi, NFT and DAO are new acronyms that people struggle to understand. But what do they mean? In this article, I will share what each one means and how they fit into the Crypto world.
DeFi is short for decentralized finance. DeFi is the term used for peer-to-peer financial services on the blockchain.
With DeFi, you can do almost everything you could do through a bank like earn interest, borrow, lend, and trade assets. The benefit of DeFi is the process of doing any of these actions is faster, generally cheaper and does not require you to create an account with a government-issued ID.
If I wanted to send money to my cousin in Europe from my home in the United States, the process would involve the following steps:
- visit my bank where I had to fill out paperwork and provide an ID to open an account
- request the bank to send a funds transfer to my cousin
- pay the bank a fee for initiating the fund's transfer
- my bank will send funds to another central bank in Europe which requires me to pay a fee to them
- the central bank in Europe would then send the funds on to the bank my cousin uses in Europe which requires me to pay yet another fee
- when funds arrive at the bank (in 2-5 days), my cousin can withdraw the funds but only after he pays a fee to the bank
DeFi eliminates the need to have a centralized bank to be able to send money to my cousin in Europe. I can directly send him digital currency like Bitcoin or Ethereum and that currency shows up in his digital wallet a few seconds to a few minutes later.
Another advantage of DeFi is I can send currency to my cousin without first having to create an account with a centralized bank.
If I have digital currency I can lend out my crypto and earn interest and rewards every month. If I had a Certificate of Deposit (CD) at a bank, I would not be paid interest until my CD matures which is generally a year after opening the CD.
If I need to borrow money, I can get a flash loan. A flash loan is a short term loan. If I wanted a short-term loan from my bank, I would have to fill out an application and my ability to get the loan would be determined by some arbitrary credit score. DeFi eliminates these hassles.
Banks traditionally pay interest on savings accounts. The rate they pay on these accounts is usually very low. Bank make a profit off of taking the money that you have in a savings account with them and then lends that money out to people wanting a loan. The difference between the interest rate they receive from the loan and the amount they pay out in interest on a savings account is their profit. If you earn interest on your digital crypto you can expect to earn a much higher rate of return because of the elimination of the bank as a middleman.
DAO is short for Decentralized Autonomous Organization. A DAO is an organization that operates under a shared goal. Every member of the DAO has an equal say in making decisions.
There is no central authority in a DAO. This is the polar opposite of a company structure in which there is a CEO, Vice Presidents, Division Heads, Managers and then the individual contributors. In a company, the CEO will make decisions and generally, the individual contributors will have no say in the decision-making process.
So if there is no central authority, how do DAOs work? Members of the DAO will create proposals in which they lay out what direction they think the DAO should take. Every member of the DAO votes for proposals that they think will provide the best benefit for the DAO. Familiar hierarchical structures seen within large corporations give way to community collaboration under this framework.
The initial rules of the DAO are established by a core team that is responsible for creating the DAO. These rules are written down in a Smart Contract and that contract is deployed to the blockchain. Anybody can view the contents of the Smart Contract.
Once the DAO is created the members of the core team will focus on funding. Generally, a DAO will raise money by selling its token. The funds received from the sale of the token are used to fund the treasure for the DAO.
People will find DAOs that have a guiding principle that they are interested in and they will join the DAO. Now as a member. you have the right to vote on all proposals as well as create your proposal for the direction of the DAO.
Members of the DAO can be located anywhere in the world. The members will not go to an office location like they would if they were employees of a corporation. To facilitate communication between all members of the DAO, they will create a discord channel. Communication can freely flow between all members in the discord channel.
NFT is short for Non-fungible tokens. In simple terms, this means that an NFT is unique and can't be replaced with something else. NFTs are digitally unique, no two NFTs are the same.
NFTs can be anything digital. Drawings, music, collectables or even real estate are examples of what can be represented by an NFT.
Every NFT has an owner. This ownership is recorded on the Blockchain. If you are interested in purchasing an NFT, you can easily verify the seller is the actual owner by checking the Blockchain.
Digital creatives can create a product as an NFT and then be able to sell it to a worldwide audience. By being digital, creators can reach a much broader audience than if they were limited to selling something in a local art gallery.
Creators can choose to retain ownership rights over their work. If somebody purchases their NFT the creator would receive the currency from the purchase. If the original buyer resells the NFT to another buyer then the creator can receive a royalty payment from that sale and any future resells.