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Chapter 1

What is DeFi?

Decentralized Finance or DeFi offers financial services such as taking loans, earning yields, investing, and trading without centralized intermediaries.

What is Decentralization?

Financial services are typically facilitated by institutions such as Banks, Exchanges, and Brokerages. In DeFi, instead of large institutions, open-source programs called smart contracts that execute on blockchain networks enable these financial services.
This elimination of intermediaries that allows people and businesses to conduct financial transactions through code is decentralization.
DeFi was coined in 2018 by a group of entrepreneurs and Ethereum developers who wanted to free finance applications from traditional systems. The abbreviation sounds like defy, which is intentional.

Why is DeFi intriguing?

  1. Anyone can participate: Traditional Finance has gatekeepers and opaque rules that decide who can access the services offered. In contrast, DeFi is open to all. Anyone with a cryptocurrency wallet can participate in DeFi. DeFi is Permissionless.
  2. Cryptocurrency wallets are free & open for anyone to create.
  3. Anyone can verify: Open Source code enables DeFi. These codes self-execute on the Blockchain Network, and anyone with the right technical skills can verify the correctness of the services offered by DeFi Protocols. DeFi is Transparent.
  4. Anyone can build on DeFi: Builders overcome multiple hurdles to innovate with traditional finance. In DeFi, engineers can create new services by using existing DeFi protocols. DeFi is Interoperable.
  5. Anyone can access DeFi without sacrificing privacy: People go through extensive KYC to avail of services from traditional financial institutions. In DeFi, these services can be accessed under pseudonyms instead of real identities. DeFi is Pseudonymous.
  6. Anyone can access DeFi without giving up custody: Customers only have access to their money kept in banks, but the absolute custody lies with banks. DeFi services interact with smart contracts, and no intermediary is involved. Users have complete custody of their funds through their cryptocurrency wallets. DeFi is Non-custodial.
  7. Anyone can access DeFi without trusting a third party: Customers need to trust their bank to keep their money safe. In DeFi, smart contracts handle funds & remove the need to trust any intermediary. DeFi is Trustless.

How does DeFi differ from Traditional Finance?

DeFi relies on code.
TradFi (Traditional Finance) relies on people.
You are in control of your money.
Traditional financial institutions hold your money.
You maintain the security of your money.
You trust companies not to lose your money.
You can be pseudonymous in DeFi.
Your financial activity is linked to your identity.
DeFi is open to anyone.
You must fulfill multiple criteria to access TradFi.
Decentralized finance is freedom from centralized intermediaries & opaque economy.  Take the first step toward the future: Set up a Wallet

Set up a Wallet