What is DeFi?

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Understanding What is DeFi

What is DeFi? Decentralized Finance or DeFi is a system that aims to provide financial services that are open, unlicensed, transparent and available to everyone without any centralized authority.

DeFi can do this because the smart contract technology behind it can allow developers to build functionality that is much more sophisticated than just sending or receiving digital currency.

DeFi can be a global alternative to any financial service in use today. For example, savings, loans, trade, insurance and others can be accessed by anyone in the world by only using a smartphone and an internet connection.

Even though it can be accessed openly, users still have full control over their assets by using decentralized applications or Dapps. This application allows users to create stablecoins, lend money and earn interest on their crypto assets.

Users can also take loans, exchange assets, buy long-term or short-term assets to implement sophisticated and automatic investment strategies.

There is no intermediary

If a traditional bank has an intermediary to make transactions, DeFi is the opposite. The blockchain technology used by DeFi doesn't need that, so transactions can be done quickly. Users can also take control of the assets or funds they have and monitor them if there are changes.

The service will not be closed

In a bank, if there is a crisis or problem, the service may be closed and customers cannot access the data or funds they have. But at DeFi this is impossible to happen, because financial services in decentralized finance are installed on the blockchain.

So that the recorded and scattered data consists of thousands of nodes which makes potential closure of service almost impossible. User data remains safe because it has multiple copies spread across the network.

Ease of access

On DeFi, users can access it anywhere as long as they have an internet connection and a smartphone. Decentralized finance also allows people who do not have financial services in low-income areas to gain access to financial services provided by DeFi.

Reducing costs

DeFi can reduce transaction fees because it does not use intermediaries, so users do not have to pay additional fees for transactions.

Difference between DeFi and Conventional Bank

What is the difference between DeFi and Conventional Banks?

The first thing that distinguishes DeFi from conventional banks is the management. If a conventional bank is managed by institutions and employees, DeFi writes all the rules in code in a smart contract which is then propagated onto the blockchain, and later DeFi can carry out its own operations with little or no human intervention.

The second is transparency, the code in this technology can be seen by anyone. All transaction activity is open but under a pseudonym. So that even though it is very transparent, users still have privacy.

If conventional banks were not yet global and only limited to one country, DeFi was designed to be global from the start. For example, one user is in America and the other is in Indonesia, both users still have access to the same DeFi network and services.

The fourth difference from conventional banks which have complicated licenses, DeFi is the opposite, anyone can participate and use it.

Global access to financial services

One of the motivations for establishing DeFi is that there are still many people who lack access to financial services due to various obstacles, such as long distances between economic activities and service providers.

With Defi, this can be overcome, even for people with low income they can still access financial services freely as long as they have an internet connection and a smartphone.

In this decentralized system, traders in global financial companies will have access to various levels, for example to farmer groups in Indonesia or other countries.

Cheaper cross-border payments

Decentralized finance eliminates intermediaries so that remittances are cheaper. In the current system, the cost of sending money between countries has a remittance fee of around 7%, however through this decentralized service this fee can be lowered to below 3%.

Censorship resistant transactions

In this decentralized system transactions cannot be changed, and the blockchain cannot be closed by governments, central banks or large companies. In a country that is experiencing a crisis or has a dictatorial government, the presence of DeFi is certainly very helpful because people can move their funds there to protect against inflation or adverse economic policies.

Improved privacy and security

In decentralized finance, users have direct access to their accounts and can carry out transactions safely without validation from a central authority such as the central bank.

Quite easy to use

Decentralized finance has several types of transactions that are easier and less complex so that they can be easily understood. For example, by using this system, business people in Indonesia can get investment and capital from users in other countries.

Total Valuation Reaches More than 8 Billion US Dollars

Based on data from DeFi Pluse as of September 1, 2020, the total valuation of crypto assets stored there is $ 8.8 billion distributed across 39 applications. The top three DeFi's are Aave ($ 1.6 Billion), Maker ($ 1.52 Billion), and Uniswap ($ 1.3 Billion). This order can change over time because the user is free to choose which application to use.

Popular DeFi Products

If we check Defipulse, we can see a variety of products and DeFi apps currently available. Starting from DEX or decentralized exchange, lending, derivatives, to assets.

The most popular and fast growing DeFi product or sector is the borrowing and lending platform. This sector is similar to a bank, where users deposit money and earn interest from other users who borrow their assets.

However, in this case the assets are digital and smart contracts that connect lenders with borrowers, impose loan terms, and distribute interest. And it all happens without needing to trust each other or any intermediary bank.

Then, by not using a third party, lenders are able to get higher returns and better understand the risks thanks to the transparency provided by blockchain.

Tokens called stablecoins are also important to the DeFi ecosystem. Stablecoins are tokens designed to store a certain amount of value and are usually pegged to fiat currencies such as the US dollar. In DeFi the stablecoin used is DAI, to get DAI you can pledge Ether on a smart contract as collateral.

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That's an explanation of what DeFi or Decentralized Finance is. Basically, this system is focused on building independent financial and financial services, separate from the traditional financial system which is fixated on government policies.

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Important point

What is DeFi?

DeFi or decentralized finance is a movement that aims to provide financial services that are open, unlicensed, transparent and available to everyone without a centralized authority.

On which blockchain does DeFi operate?

DeFi is built on the ethereum blockchain

What are the benefits of DeFi?

Make payments easier, cheaper and faster and reach various groups without many obstacles.

What are the impacts of DeFi globally?

Global access to financial services, cheaper cross-border payments, good privacy and security, and so on.

What is the motivation for DeFi?

DeFi is here to provide financial services to all circles and places as long as they have internet access and smartphones.

How is DeFi different from conventional banks?

DeFi does not have centralized authority, it is flexible, all transactions are open and so on.

What are the popular DeFi products?

Stable coins, lending platforms, DEX and derivatives.

What are the popular DeFi platforms?

Some of the popular DeFi platforms 2020 are Aave, Maker, Uniswap, Yearn Finance, and Compound.

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