The second issue or problem with centralized finance is limited access. What do I mean by that? Decentralized finance, I've said this and I'll say many more times, is financial democracy. It gives underserved groups, such as the unbanked and the underbanked, the ability to actually operate in the Internet of value. You might think even within the US that, well, everybody's banked. But they're 18 million people in the US that are unbanked. This is a very significant problem, and the impact for the global economy is very significant. Essentially, DeFi gives consumers access to things that they might not have access to before. It's only a very small fraction of the global population has access to things like credit or debit cards. The products are restricted in centralized finance, and indeed, the decentralized financial institutions, it's their incentive to go for the most profitable slice of the population. They don't want to deal with the small entrepreneurs, they don't want to deal with the small customer. They'll increase fees or just not be welcoming of them. In DeFi, it doesn't matter who you are. There's no check. Remember I said that in centralized finance, there's the customer, the retailer, the banker, the regulator. There's no labels like that. Everybody is the same. They are peers. It's true that some peers might have more wealth than other peers, but it doesn't matter. Their transactions are treated identically to the transactions for those that don't have as much wealth. There's other things that are interesting and this is very recent in the space of DeFi. Suppose you do have a bank account, and you want to put your money to work and earn some interest. You want to at least cover the rate of inflation, and that's usually how it works. However, in most of the world right now, interest rates don't cover the rate of inflation. When you deposit your money at a bank, you get zero or trivial interest rate that is way below the inflation rate. That means that you're losing real wealth. DeFi offers the following possibility. Well, the question is, why are the rates so low for deposits and why are the borrowing rates so high? A lot of this has to do with all of the fixed costs of centralized finance. If you get rid of the fixed costs, then it's possible to increase the savings rate and decrease the actual lending rate. This is exactly what's happening in decentralized finance. If you, let's say, have a stablecoin like USDC, you can deposit that into a liquidity pool, and we'll go into a lot of detail as to how this works in the third course, DeFi, a deep dive. But you get a reward for actually doing that. A savings rate, and these savings rates are much higher than the bank savings rates are today. Indeed, if you think about what happens in traditional banking, you put your money as a deposit, and you get paid very little interest. But the bank takes that deposit and lends it out. Then the person that gets the loan might deposit some of that in another bank. The cycle just continues and it's called a money multiplier. Well, the same thing can happen in decentralized finance, where I deposit some money with liquidity pool in one particular protocol, and then I get effectively a token from that, that represents my share, my ownership of that pool. Well, I can deposit that token somewhere else and earn interest on it too. Again, we are disintermediating the bank, and it's essentially doing the same thing that a bank is doing, having a money multiplier but within this space. The bottom line here is that you're able to get a rate of return on your deposit that is not as risky as investing in Bitcoin or Ethereum, and have a chance at a rate of return that meets or exceeds the rate of inflation. Again, this is open to anybody. You don't need to be a big player to actually do this. This is a very simple technology. There are many benefits to so-called yield farming. However, you also need to be careful because many are making promises that seem unrealistic and it's always best to go with the protocols that have been out there a while and tested. There's always a risk to take care of. There's another idea in terms of limited access and it's called an initial DeFi offering. We know what initial public offerings are. Initial public offerings are when a private company goes public on a stock exchange. The stock might have been privately traded, and those that able to trade that stock are usually very high net worth individuals. There's a long process that you need to go after to actually be listed on a centralized stock exchange. That is really not available to most companies. Very small number of companies are listed on stock exchanges compared to the number of companies in general. The reason is limited access. Why would you want to be listed? Well, it's a way to raise equity. It's funding. You can go to the bank, you can go and maybe sell somebody a bond, or you can offer equity. This is fairly straightforward to do in DeFi. Equity has a different meaning. We've got equity, we've got tokens, and we'll go through all the details of this. But the idea with an initial DeFi offering is that we can actually launch a token in a very straightforward way in a smart contract and essentially set an exchange rate or a floor rate on that token if we're the first liquidity provider. This is very straightforward to actually do. Let's go through the mechanics of how this actually works. Let's say we've got a token, we'll call it DFT and it's got an initial supply of two million. What we can do is we can make the initial DFT token worth 10 cents. We'll quote things in terms of USDC, which is linked and guaranteed by Coinbase in terms of its peg to one dollar. Basically, what you could do is to create an initial market where you've got a million DFT in a liquidity pool with 100,000 US dollar tokens. Basically, here's a situation where people are purchasing the DFT that will drive up the price, and you immediately set the price given what you've contributed to the liquidity pool. This is a very straightforward mechanism and quite popular today. It allows for a startup to instantly come to market. If you think of coming to market with a product, it's so complicated, this is all done virtually. It's all within the smart contract. There are some disadvantages and let me be up front. One disadvantage is that the floor that's set is somewhat artificial. There could be price discovery that suggests this token is not worth 10 cents, it really should be worth five cents. This is not perfect, but it just allows people to innovate very quickly. Again, this is part of the democratization of access and IDOs are one of the components of that democracy. This is a way to deliver user access to have an entrepreneur launch something very quickly, very cheaply, without the traditional baggage of hiring an investment bank and lawyers and all of the fees that are associated with that.
