I held a candid conversation with a soon-to-retire sports personality (name withheld for ethical reasons but let’s call her Jane) about her future after years of active professional sporting. She was concerned about how to sustain her charitable activities without blowing her savings.

Influential individuals, including celebrities and athletes, are very active in charitable activities. The strong influence that communities have in supporting ‘one of their own’ or backing their home team help fuel these relationships. Some of the successful athletes are also beneficiaries of community driven non-profit programs. Therefore, athletes are more likely inclined to returning the favor through engaging in community empowerment activities. But at what cost?

From my conversation with Jane, she told me that despite having registered a non-profit under her name, her donations to other charities were made using her personal account (nothing wrong). However, as someone who wants to engage more in charity work, the problem then becomes how does she solicit for funds using your personal account? And how does she manage her personal finances separate from the charity work?

Like Jane, there are other individuals passionate about charity work but lack strategies to raise funds from their networks and hence end up blowing their savings just to keep up with the spirit of giving back to the community.

Without following a solid plan, it is easy to veer off your goals. And without a strategy, lack of financial prudence creeps in and this becomes a liability to your personal and non-profit accounts.

Once concerns about financial management and accountability set in, the risk of harm to your brand and person escalates. The impact is devastating to both your non-profit activities and to your personal life, including financially. The negative publicity damages your reputation and credibility. It might also attract punitive action from government and professional enforcement agencies.

Some of the disciplinary actions from professional regulators and government (federal) include; deregistration, freezing of personal and the organization’s assets, or imposition of fines to serve as a warning.

Luckily for Jane, her case was quite straight forward as so my input was technical. We set up the technical structures for her non-profit and developed a strategic, operational plan. The strategic operation plan will act as the policy guideline for the non-profit in the midterm.

I am also glad to have met Jane and worked with her to develop a prudent plan on how to solicit and manage funds from donors in her network. Most importantly, I am glad to have worked with Jane in separating her personal financial activities from those to do with her organization.

There might be other people with similar concerns like the ones that Jane experienced. Others might have unclear strategic fundraising plans. I advise you seek professional assistance to straighten up these concerns. They not only stifle your organization’s growth potential, but also exposes you to self-inflicted reputation or financial harm.

If you were to pick a frog and put it into shallow hot boiled water, the frog will instantly leaped from the pot and jump out to safety. However, if you were to pick up the same frog a little later and then put it into a shallow cold water, the frog will not react to it and will be comfortably be sitting there as it is a cold blooded animal. But, if you were to do experiments by heating up the cold pot with a very slow fire with the frog still sitting in it. The water will eventually rise up to 100 degrees. As any cold-blooded animal, the frog’s body will adapt to the rising heat and will adjust its blood temperature to the environment. Eventually, when the water reaches boiling point, the frog will die as a result of adapting itself to the environment without even realizing it.

So, what’s personal financing have to do with the frog story? People who started off their career start just like the frog in the shallow cold water. The money they received by the end of the month is enough to get by since their requirement for life is low. But, as your career and salary increase so does your desires and lifestyles. As you start to buy your first car, buy your first house, started to use credit cards, your lifestyle will change incrementally but not as fast as your salary increase. As same with the frog, you will not notice that you have a debt problem since the increment is not sudden. And when you realize it, it is too late and you will end up with a huge pile of debt.

There are many paths for us to achieve financial freedom, but the majority of us choose the path of job security. How can we blame them? The education system was shaped to produce workers and not entrepreneurs. Many people realized that as the company their working with starts to prosper, the owner of the company is the one who eventually benefits and the employees usually are not much richer compared to the first day they started working there. The reality is that the boss is not responsible to make you rich, but their responsibility is just to make sure you got your paycheck by the end of the month. It is your responsibility to make sure that you will end up rich and not somebody else.

One of the most propitious industries for blockchain technology is trade finance. Many of the world’s largest banks are putting time into its research and development.

Thanks to a consortium of 71 global financial leaders, R3CEV, much has been uncovered about potential uses of blockchain technology.

Since 2016, R3 has executed several pilot runs in the marketplace to complement their research. They will continue to improve these strategies until ready to fully enter the market.

So, what are some of their findings of potential use? Here’s the future of trade finance with blockchain technology companies.

Monitor Real-Time Status and Condition

One of R3’s members, CBA, is a leading contributor to the research of blockchain technology. Currently, they are undergoing 3 different projects to analyze blockchain use.

They are conducting a trial run with exporters who ship cotton. A humidity monitor is placed inside the canister, which is linked to IoT and GPS.

This monitor allows consumers to track their shipments with real-time status. Also, they are able to evaluate the condition of their product as it travels through.

Other national blockchain technology companies are running pilots, similar to this study. In Singapore, Hellosent is conducting similar tests. However, they’re studying the import of French wine.

Eliminate Unpaid Settlements

A growing issue for grain farmers is a financial loss due to trade insolvencies. An estimated $50 million was lost in 2014 because of this activity.

It takes roughly 4-6 weeks for a farmer to receive payment for their shipments. At that, often times conflict arises between farmers and buyers over payment complications (failing to pay the appropriate amount, late payment, etc.).

Australian start-up, Full Profile, has taken matters into their own hands.

Their blockchain platform allows farmers to now receive automatic payment upon delivery of grains. This will significantly reduce the risk of dispute between farmers and buyers.

Once Full Profile’s application is fully functional in a domestic setting, they will expand on external trade.

Digitize

The use of blockchain technology can also be beneficial to reducing financial loss and risk. Upon further development, it will be able to digitize sales and legal arrangements.

Trade finance is an unwieldy industry, that relies heavily on settlements and contracts. Currently, most of these agreements are handled the old-fashioned way: paper copies.

Blockchain technology will remove the need for this paper-based system. This ultimately reduces the risk of financial loss as documents are often lost, mishandled, or tarnished.

Electronic documentation can be tracked much more efficiently. Also, it cuts out the need for a third-party verification system.

Interested in Learning More About Blockchain Technology Companies?

Blockchain technology creates transparency in financial trade between buyers and sellers. From the moment an order is made up until payment, blockchain is capable of simplifying the trade process.

Are you looking to jump into the world of international trade? You’re at the right place. It would be great to know your thoughts and comments.

When it comes to the different types of business loans available in the marketplace, owners and entrepreneurs can be forgiven if they sometimes get a little confused. Borrowing money for your company isn’t as simple as just walking into a bank and saying you need a small business loan.

What will be the purpose of the loan? How and when will the loan be repaid? And what kind of collateral can be pledged to support the loan? These are just a few of the questions that lenders will ask in order to determine the potential creditworthiness of a business and the best type of loan for its situation.

Different types of business financing are offered by different lenders and structured to meet different financing needs. Understanding the main types of business loans will go a long way toward helping you decide the best place you should start your search for financing.

Banks vs. Asset-Based Lenders

A bank is usually the first place business owners go when they need to borrow money. After all, that’s mainly what banks do – loan money and provide other financial products and services like checking and savings accounts and merchant and treasury management services.

But not all businesses will qualify for a bank loan or line of credit. In particular, banks are hesitant to lend to new start-up companies that don’t have a history of profitability, to companies that are experiencing rapid growth, and to companies that may have experienced a loss in the recent past. Where can businesses like these turn to get the financing they need? There are several options, including borrowing money from family members and friends, selling equity to venture capitalists, obtaining mezzanine financing, or obtaining an asset-based loan.

Borrowing from family and friends is usually fraught with potential problems and complications, and has the potential to significantly damage close friendships and relationships. And the raising of venture capital or mezzanine financing can be time-consuming and expensive. Also, both of these options involve giving up equity in your company and perhaps even a controlling interest. Sometimes this equity can be substantial, which can end up being very costly in the long run.

Asset-based lending (or ABL), however, is often an attractive financing alternative for companies that don’t qualify for a traditional bank loan or line of credit. To understand why, you need to understand the main differences between bank loans and ABL – their different structures and the different ways banks and asset-based lenders look at business lending.

Cash Flow vs. Balance Sheet Lending

Banks lend money based on cash flow, looking primarily at a business’ income statement to determine if it can generate sufficient cash flow in the future to service the debt. In this way, banks lend primarily based on what a business has done financially in the past, using this to gauge what it can realistically be expected to do in the future. It’s what we call “looking in the rearview mirror.”

In contrast, commercial finance asset-based lenders look at a business’ balance sheet and assets – primarily, its accounts receivable and inventory. They lend money based on the liquidity of the inventory and quality of the receivables, carefully evaluating the profile of the company’s debtors and their respective concentration levels. ABL lenders will also look to the future to see what the potential impact is to accounts receivable from projected sales. We call this “looking out the windshield.”

An example helps illustrate the difference: Suppose ABC Company has just landed a $12 million contract that will pay out in equal installments over the next year, resulting in $1 million of revenue per month. It will take 12 months for the full contract amount to show up on the company’s income statement and for a bank to recognize it as cash flow available to service debt. However, an asset-based lender would view this as receivables sitting on the balance sheet and consider lending against them, depending on the creditworthiness of the debtor company.

In this scenario, a bank might lend on the margin generated from the contract. At a 10 percent margin, for example, a bank lending at 3x margin might loan the business $300,000. Because it looks at the trailing cash flow stream, an asset-based lender could potentially loan the business much more money – perhaps up to 80 percent of the receivables, or $800,000.

The other main difference between bank loans and ABL is how banks and commercial finance asset-based lenders view the business’ assets. Banks usually only lend to businesses that can pledge hard assets as collateral – mainly real estate and equipment – hence, banks are sometimes referred to as “dirt lenders.” They prefer these assets because they are easier to control, monitor and identify. Commercial finance asset-based lenders, on the other hand, specialize in lending against assets with high velocity like inventory and accounts receivable. They are able to do so because they have the systems, knowledge, credit appetite and controls in place to monitor these assets.

Apples and Oranges

As you can see, traditional bank lending and asset-based lending are really two different animals that are structured, underwritten and priced in totally different ways. Therefore, comparing banks and asset-based lenders is kind of like comparing apples and oranges.

Unfortunately, many business owners (and even some bankers) don’t understand these key differences between bank loans and ABL. They try to compare them on an apples-to-apples basis, and wonder especially why ABL is so much “more expensive” than bank loans. The cost of ABL is higher than the cost of a bank loan due to the higher degree of risk involved in ABL and the fact that asset-based lenders have invested heavily in the systems and expertise required to monitor accounts receivable and manage collateral.

For businesses that do not qualify for a traditional bank loan, the relevant comparison isn’t between ABL and a bank loan. Rather, it’s between ABL and one of the other financing options – friends and family, venture capital or mezzanine financing. Or, it might be between ABL and foregoing the opportunity.

For example, suppose XYZ Company has an opportunity for a $3 million sale, but it needs to borrow $1 million in order to fulfill the contract. The margin on the contract is 30 percent, resulting in a $900,000 profit. The company doesn’t qualify for a bank line of credit in this amount, but it can obtain an asset-based loan at a total cost of $200,000.

However, the owner tells his sales manager that he thinks the ABL is too expensive. “Expensive compared to what?” the sales manager asks him. “We can’t get a bank loan, so the alternative to ABL is not landing the contract. Are you saying it’s not worth paying $200,000 in order to earn $900,000?” In this instance, saying “no” to ABL would effectively cost the business $700,000 in profit.

Look at ABL in a Different Light

If you have shied away from pursuing an asset-based loan from a commercial finance company in the past because you thought it was too expensive, it’s time to look at ABL in a different light. If you can obtain a traditional bank loan or line of credit, then you should probably go ahead and get it. But if you can’t, make sure you compare ABL to your true alternatives.

When viewed in this light, an asset-based loan often becomes a very smart and cost-effective financing option.

The first of the top 5 investment banks to fall was Bear Sterns, in March of 2008. Founded in 1923, the collapse of this Wall Street icon shook the world of high finance. By the end of May, the end of Bear Sterns was complete. JP Morgan Chase purchased Bear Stearns for a price of $10 per share, a stark contrast to its 52 week high of $133.20 per share. Then, came September. Wall Street, and the world, watched while, in just a handful of days, the remaining investment banks on the top 5 list tumbled and the investment banking system was declared broken.

Investment Bank Basics

The largest of the investment banks are big players in the realm of high finance, helping big business and government raise money through such means as dealing in securities in both the equity and bond markets, as well as by offering professional advice on the more complex aspects of high finance. Among these are such things as acquisitions and mergers. Investment banks also handle the trading of a variety of financial investment vehicles, including derivatives and commodities.

This type of bank also has involvement in mutual funds, hedge funds, and pension funds, which is one of the main ways in which what happens in the world of high finance is felt by the average consumer. The dramatic falling of the remaining top investment banks affected retirement plans and investments not just in the United States, but also throughout the world.

The High Finance Finagling That Brought Them Down

In an article titled “Too Clever By Half”, published on September 22, 2008, by Forbes.com, the Chemical Bank chairman’s professor of economics at Princeton University and writer Burton G. Malkiel provides an excellent and easy to follow breakdown of what exactly happened. While the catalyst for the current crisis was the mortgage and lending meltdown and the bursting of the housing bubble, the roots of it lie in what Malkiel calls the breaking of the bond between lenders and borrowers.

What he is referring to is the shift from the banking era in which a loan or mortgage was made by a bank or lender and held by that bank or lender. Naturally, since they held onto the debt and its associated risk, banks and other lenders were fairly careful about the quality of their loans and weighed the probability of repayment or default by the borrower carefully, against standards that made sense. Banks and lenders moved away from that model, towards what Malkiel calls an “originate and distribute” model.

Instead of holding mortgages and loans, “mortgage originators (including non-bank institutions) would hold loans only until they could be packaged into a set of complex mortgage-backed securities, broken up into different segments or tranches having different priorities in the right to receive payments from the underlying mortgages,” with the same model also being applied other types of lending, such as to credit card debt and car loans.

As these debt-backed assets were sold and traded in investment world, they became increasingly leveraged, with debt to equity ratios frequently reaching as high as 30-to-1. This wheeling and dealing often took place in a shady and unregulated system that came to be called the shadow banking system. As the degree of leverage increased, so too did the risk.

With all the money to be made in the shadow banking system, lenders became less choosy about who they gave loans to, as they were no longer holding the loans or the risk, but rather slicing and dicing them, repackaging them and selling them off at a profit. Crazy terms became popular, no money down, no docs required, and the like. Exorbitant exotic loans became popular and lenders trolled the depths of the sub-prime market for still more loans to make.

Finally, the system grinded almost to a halt with the fall of housing prices and increased loan defaults and foreclosures, with lenders making short term loans to other lenders being afraid of making loans to such increasingly leveraged and illiquid entities. The decreased confidence could be seen in the dropping share prices as the last of the top investment banks drowned in shaky debt and investor fear.

September saw Lehman Brothers fail, Merrill Lynch choose takeover over collapse, and Goldman Sacs and Morgan Stanley retreat to the status of bank holding companies, with potential buyouts on the horizon. Some of these investment banks dated back nearly a century, and others longer, such as the 158-year old Lehman Brothers. Quite an inglorious end for these historic giants of finance, destroyed by a system of high finance finagling and shady dealings, a system that, as it falls apart, may even end up dragging down the economy of the entire world.

Sources of business finance can be studied under the following heads:

(1) Short Term Finance:

Short-term finance is needed to fulfill the current needs of business. The current needs may include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The need for short term finance arises because sales revenues and purchase payments are not perfectly same at all the time. Sometimes sales can be low as compared to purchases. Further sales may be on credit while purchases are on cash. So short term finance is needed to match these disequilibrium.

Sources of short term finance are as follows:

(i) Bank Overdraft: Bank overdraft is very widely used source of business finance. Under this client can draw certain sum of money over and above his original account balance. Thus it is easier for the businessman to meet short term unexpected expenses.

(ii) Bill Discounting: Bills of exchange can be discounted at the banks. This provides cash to the holder of the bill which can be used to finance immediate needs.

(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, these are also used as source of financing the operations necessary to execute the job order.

(iv) Installment Purchases: Purchasing on installment gives more time to make payments. The deferred payments are used as a source of financing small expenses which are to be paid immediately.

(v) Bill of Lading: Bill of lading and other export and import documents are used as a guarantee to take loan from banks and that loan amount can be used as finance for a short time period.

(vi) Financial Institutions: Different financial institutions also help businessmen to get out of financial difficulties by providing short-term loans. Certain co-operative societies can arrange short term financial assistance for businessmen.

(vii) Trade Credit: It is the usual practice of the businessmen to buy raw material, store and spares on credit. Such transactions result in increasing accounts payable of the business which are to be paid after a certain time period. Goods are sold on cash and payment is made after 30, 60, or 90 days. This allows some freedom to businessmen in meeting financial difficulties.

(2) Medium Term Finance:

This finance is required to meet the medium term (1-5 years) requirements of the business. Such finances are basically required for the balancing, modernization and replacement of machinery and plant. These are also needed for re-engineering of the organization. They aid the management in completing medium term capital projects within planned time. Following are the sources of medium term finance:

(i) Commercial Banks: Commercial banks are the major source of medium term finance. They provide loans for different time-period against appropriate securities. At the termination of terms the loan can be re-negotiated, if required.

(ii) Hire Purchase: Hire purchase means buying on installments. It allows the business house to have the required goods with payments to be made in future in agreed installment. Needless to say that some interest is always charged on outstanding amount.

(iii) Financial Institutions: Several financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long-term finances. Besides providing finance they also provide technical and managerial assistance on different matters.

(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) are also used as a source of medium term finances. Debentures is an acknowledgement of loan from the company. It can be of any duration as agreed among the parties. The debenture holder enjoys return at a fixed rate of interest. Under Islamic mode of financing debentures has been replaced by TFCs.

(v) Insurance Companies: Insurance companies have a large pool of funds contributed by their policy holders. Insurance companies grant loans and make investments out of this pool. Such loans are the source of medium term financing for various businesses.

(3) Long Term Finance:

Long term finances are those that are required on permanent basis or for more than five years tenure. They are basically desired to meet structural changes in business or for heavy modernization expenses. These are also needed to initiate a new business plan or for a long term developmental projects. Following are its sources:

(i) Equity Shares: This method is most widely used all over the world to raise long term finance. Equity shares are subscribed by public to generate the capital base of a large scale business. The equity share holders shares the profit and loss of the business. This method is safe and secured, in a sense that amount once received is only paid back at the time of wounding up of the company.

(ii) Retained Earnings: Retained earnings are the reserves which are generated from the excess profits. In times of need they can be used to finance the business project. This is also called ploughing back of profits.

(iii) Leasing: Leasing is also a source of long term finance. With the help of leasing, new equipment can be acquired without any heavy outflow of cash.

(iv) Financial Institutions: Different financial institutions such as former PICIC also provide long term loans to business houses.

(v) Debentures: Debentures and Participation Term Certificates are also used as a source of long term financing.

Conclusion:

These are various sources of finance. In fact there is no hard and fast rule to differentiate among short and medium term sources or medium and long term sources. A source for example commercial bank can provide both a short term or a long term loan according to the needs of client. However, all these sources are frequently used in the modern business world for raising finances.

Finance is news for every one’s consideration. Those who are in this industry, have to keep themselves updated always about the latest happenings in the market. But for those also, who just want to have an extra knowledge about the most happening field in the market today, they should be well updated about the latest news and updates regarding financial conditions in market.

Looking broadly at this situation, there are many ways to keep updated, but not every way is feasible. One way is to have a work circle of your colleagues and like many people that interact with each other in order to develop newer things in a particular field. There can be research topics and opinion exchange between these people. This is not possible always because different people have their different views and its not always possible to cope up with other’s views. Other option is to have some subscription of a business magazine or some book that gives you monthly or weekly update about financial conditions. Usually such magazines involve huge subscription fees which may not be every time affordable.

One more option is to use the latest technologies and go for internet to search for your topic of interest. But as they say, nothing is free and in case of free finance magazines, this information can also cost some value. So what remains is to search for such a free finance magazines which gives you free information and updates about the current financial market conditions. There are many such websites available which provide you free finance magazines having information about current topics and changes in the financial stabilities. Get to know all the views and reviews from the experts in the industry along with the new schemes of investments and capital management. Get free subscriptions for worldwide leading famous magazines. For such free digital subscriptions, you have to fill a simple form consisting of your personal details such as name, detailed address, company name, business email, the sector under which your company belongs etc. After the confirmation of your email, you get to choose the type of services you wish to receive from them; all this and with no subscription costs involved.

News from magazines related to daily facts about business related to safety of organizations, various pension schemes and retirement investment plans, news and updates related to the international organizations such as ICFA (International Custody and Fund Administration) and more are obtained. You get to interact with many renowned individuals in this field and get their views on your queries. You can post your queries to one of the magazines and get the editorial reviews and solutions on your situation. Get the latest information about various investment plans including local as well as international market investments.

All businesses rely on their cash funds to operate. Although most businesses typically depend on a steady cash flow to sustain their venture, unfortunately, importing companies usually do not enjoy such liberties. This is mainly because import companies have long cash flow cycles.

Businesses in the import industry will therefore need to have and use the right financing strategies in place so that their venture won’t go under. In addition, owners of import businesses shouldn’t be complacent with the financing strategies they have; they should find ways to improve them.

Below are some tips for businesses on improving their finance strategies:

Be mindful and keep track of all relevant rules and regulations of import. To effectively import finance strategies, owners of importing businesses need to be aware of the regulations and rules set by the different countries for import. Being knowledgeable of all applicable rules and regulations of import finance strategies is important to keep things fast. In addition, knowing the key shipping details and rules is crucial because this helps increase understanding of the whole business.

Select the most suitable payment method. Choosing the right payment method is another important step business owners need to improve their import finance strategies. The most common payment methods import business owners can choose from include Letters of Credit or LOC, bills of exchange arrangement, and open account. According to finance experts, these options are considered the best in the import and export industry since they make transactions easier. If you are still in the process of selecting your payment method, make sure that you know the transaction fees and hidden charges before making your final decision.

Choose a good and reliable financial institution to work with. Selecting a trustworthy financing partner is also crucial in improving your finance strategies. Although there are numerous of these institutions today, not all these establishments can fit your business needs. Take the time to do sufficient research on these institutions and check their services so that you can make a choice that can promise the best returns.

Have contingencies in place. Finally, make sure you have substitutes. Various financing institutions offer solutions that can help secure the interests of both the sellers and buyers. However, a few issues may arise that can have a long-lasting impact on your company’s import finance strategies. Because of this, it is important to search for substitutes. For instance, if you choose to pay for your order beforehand, do this only for low value shipments. With long-term business partners, consider opening an account with them. This strategy can help you to be secure and have a more profitable business.

Business financing options are provided by a number of non bank specialized finance companies in Canada. They provide an array of corporate solutions, all of them different but still allowing you to achieve cash flow and working capital goals. They are in fact, the answer to.. you guessed it ‘ no bank financing’ conundrums.

The challenge for business owners and financial managers is to identify and execute on who those sources are and what they can do for your company. Many companies, and industries in fact have specialize needs.

When you think of the right type of business financing for your company it’s important to think of senior and junior! What do we mean by that comment? Simply that a senior lender will want all the security on your business, typically handled by a document called the G S A – General Security Agreement. It then becomes a challenge to source other types of cash flow and debt solutions which can’t be monetized.

A good example of a senior lender is Canadian chartered banks. But when that source of capital isn’t available many firms these days choose asset based lenders, allowing them to drawn on various assets of their business but with more flexibility.

In some cases your business might need a ‘ bridge loan’ – they solve temporary capital shortages.. they are a ‘ bridge’ to future refinancing of your business.

Leasing companies are one of those specialized asset lenders that financing both new and used equipment, even software. While many firms think they are eligible for VC or private equity financing in fact they are poor candidates for that type of financing. Many owners and financial managers spend a lot of time and money going down the venture capital / equity path, only to find they are not ready for this type of capital solution.

Is there a bottom line? We think so, Simply that if you are looking for a commercial finance company for debt and cash flow solutions alternative non bank lenders are a great choice.

What types of financing can be achieved through alternative lenders? In fact they abound and business solutions are available in receivable financing, asset based business lines of credit, tax credit financing, sale leaseback strategies, franchise loans, receivable financing.. also known as ‘ factoring ‘, etc

Seek and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of success when looking for a non bank commercial finance company in Canada.

Decentralized Finance, or “DeFi” for short, has taken the crypto and blockchain world by storm. However, its recent resurgence masks its roots in the bubble era of 2017. While everyone and their dog was doing an “Initial Coin Offering” or ICO, few companies saw the potential of blockchain far beyond a quick gain in price. These pioneers envisioned a world where financial applications from trading to savings to banking to insurance would all be possible simply on the blockchain without any intermediaries.

To understand the potential of this revolution, imagine if you had access to a savings account that yields 10% a year in USD but without a bank and practically no risk of funds. Imagine you can trade crop insurance with a farmer in Ghana sitting in your office in Tokyo. Imagine being able to be a marketmaker and earn fees as a percentage the likes of which every Citadel would want. Sounds too good to be true? It isn’t. This future is already here.

Building blocks of DeFi

There are some basic building blocks of DeFi that you should know before we move ahead:

• Automated market making or exchanging one asset for another trustlessly without an intermediary or clearinghouse.
• Overcollateralized lending or being able to “put your assets to use” for traders, speculators, and long-term holders.
• Stablecoins or algorithmic assets that track the price of an underlying without being centralized or backed by physical assets.

Understanding how DeFi is Made

Stablecoins are frequently used in DeFi because they mimic traditional fiat currencies like USD. This is an important development because the history of crypto shows how volatile things are. Stablecoins like DAI are designed to track the value of USD with minor deviations even during strong bear markets, i.e. even if the price of crypto is crashing like the bear market of 2018-2020.

Lending protocols are an interesting development usually built on top of stablecoins. Imagine if you could lock up your assets worth a million dollars and then borrow against them in stablecoins. The protocol will automatically sell your assets if you don’t repay the loan when your collateral is no longer sufficient.

Automated market makers form the basis of the entire DeFi ecosystem. Without this, you’re stuck with the legacy financial system where you need to trust your broker or clearinghouse or an exchange. Automated market makers or AMMs for short let you trade one asset for another based on a reserve of both assets in its pools. Price discovery happens via external arbitrageurs. Liquidity is pooled based on other people’s assets and they get access to trading fees.

You can now gain exposure to a wide variety of assets all in the Ethereum ecosystem and without ever having to interact with the traditional financial world. You can make money by lending assets or being a market maker.

For the developing world, this is an amazing innovation because now they have access to the full suite of financial systems in the developed world with no barriers to entry.