To keep up with emerging technology, self-made billionaire Mark Cuban is always reading and learning new things. It's a tactic he uses to understand artificial intelligence, and now he has set his sights on cryptocurrency and the technology that surrounds it, like blockchain and NFTs.
Decentralized finance, or DeFi, refers to a system of applications that aim to recreate traditional financial instruments with cryptocurrency.
For example, through DeFi lending, users can loan or borrow cryptocurrency, as you could with fiat currency at a bank, and earn interest as a lender. Interest fluctuates depending on demand at the time, and borrowers must provide collateral (with other crypto-assets), as the process is nearly anonymous. Unlike with a traditional bank, borrowers using DeFi apps cannot be held accountable with physical assets if unable to effectively pay back a loan.
DeFi applications are similar to smartphone applications, but they built with smart contracts. They typically run on the Ethereum blockchain, where ether, the second largest cryptocurrency after bitcoin, is its native currency.
Cuban is particularly interested in the use case of borrowing and lending, he told "Blockchain & Booze" host Adam Levy on March 9, which is why he thinks others should learn about DeFi.
"[T]o borrow money, I have to be overcollateralized with my bank. I've got to call somebody. I've got to do a DocuSign, or sign something, [and] it's got to get approved at multiple levels – unless I'm putting it against a credit card, or just writing a check, it's a hassle. The [bank] fees are ridiculous as a percentage," Cuban said. But, in "[o]wning a crypto asset, whether it's bitcoin or Ethereum, I can do my own banking and it's very friction-free, very straightforward and fast. That lack of friction is the game-changer."
In addition, yield farming, which is broadly the process of constantly lending and borrowing crypto to take advantage of the best interest rates – or "the search for passive income on crypto-assets," as the Harvard Business Review put it – will also be a disruptive part of DeFi, Cuban told Real Vision in an interview published Feb. 9.
The national average annual percentage yield (APY) on savings accounts is just 0.04%, according to the Federal Deposit Insurance Corporation (FDIC), and so, Cuban argues one could earn more interest by investing with cryptocurrency through DeFi applications. For example, to borrow ether from Aave, the current interest rate is 0.16%, and to borrow ether from Compound, the current interest rate is 2.88%, according to DeFi Rate.
"DeFi is highly experimental and exists in a regulatory grey zone," as The Financial Times reported. "And as with elsewhere in the cryptocurrency sphere, there are risks of scams."
For one thing, with DeFi, there is no FDIC insurance protection for your money, so it's not wise to spend money you cannot afford to lose. And DeFi applications and cryptocurrencies rely on the blockchain they run on, as The Financial Times points out, which can create "systemic risks."
Indeed, "there will be a lot of ups and downs along the way," Cuban says. But he predicts that DeFi has the potential to explode in the next 10 years, he said during a Reddit "Ask Me Anything" session in February.
Just "take your time to really know it before you do anything. Crypto isn't hard, but it can be confusing when you are first getting started," Cuban says. "Once you know it very well, consider taking part of it and earning interest. But make sure you will earn more than what it will cost you in transaction fees" (like those charged to buy or sell a coin, or to convert one coin to another).
Cuban has a vested interest in the space: He personally has a crypto wallet, owning bitcoin, ether and other coins, and he has invested in blockchain companies, like NFT marketplace Mintable. He has also bought and sold NFT-based assets, including a Maxi Kleber dunk "moment," or video clip collectible.
To Cuban, DeFi is "not going anywhere," he says.
Disclosure: CNBC owns the exclusive off-network cable rights to "Shark Tank."