Credit unions: The original DeFi

The basic concept of decentralized financial services has been around since the beginning of the credit union movement in the early 1900s. Immigrants required loans to buy animals and farm equipment, but banks were not willing to lend to them. If they did, interest rates were crippling. By pooling their money to be used for loans to other members, church parishes could offer members reasonable loan rates without the involvement of banks.

Defining DeFi
While credit unions originated low-tech Decentralized Finance, the shorthand – DeFi – has become a frequently used buzzword most closely associated with cryptocurrency. It refers to the ability of a global network of cryptocurrency holders to provide peer-to-peer financial services over a public blockchain, without the need for a bank.

As an example, if you need $2,000 and hold bitcoin currently worth $10,000, you would normally have to sell $2,000 worth. With DeFi, however, you can deposit your $10,000 of bitcoin as collateral into a piece of code running on a public blockchain called a smart contract. The smart contract maintains loan terms and automatically executes when conditions of the agreement are met. Then, you can borrow directly against it, with loan proceeds paid out in the form of a stablecoin. These smart contracts can be made from anywhere in the world, any time of day, with no paperwork required.

 

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