What is Decentralized Finance (DeFi)?

What is DeFi?

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

This can be done by DeFi because the smart contract technology is behind it, it is a program in the Ethereum Blokckchain. Smart contracts can enable developers to build functionality that is far more sophisticated than just sending or receiving digital currencies.

In addition, DeFi can be a global alternative for every financial service used today. For example savings, loans, trade, insurance and others can be accessed by anyone in the world using only a smartphone and an internet connection.

Even though it can be accessed openly, users still have full control over their assets by using a decentralized application or Dapps. This application allows users to make stablecoin, lend money and get interest on crypto assets owned.

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

Benefits of DeFi

There are no intermediaries
If traditional banks have intermediaries to conduct transactions, then DeFi is the opposite. The blockchain technology used by DeFi does not require 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.

Service will not be closed
At a bank if there is a crisis or problem, the service may be closed and the customer cannot access the data or funds they have. But in DeFi this is not possible, the problem is that financial services in decentralized finance are installed on the blockchain so that the recorded and scattered data consists of thousands of nodes which makes the potential for service closure almost impossible. User data remains secure because it has many 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 get access to financial services provided by this decentralized technology.

Reducing costs
DeFi can reduce transaction costs because it does not use intermediaries, so users do not need to pay as using conventional banks when making transactions.

Different DeFi and conventional banks

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

Second is transparency, the code in this technology can be seen by anyone. This will build different trust with the user, because anyone can understand the contract function or find bugs.

All transaction activities are open but under a pseudonym that will not be directly tied to the real identity of the user's real life. So that even though it is very transparent, users still have privacy.

If conventional banks are not yet global and only limited to one country, DeFi has been designed from the beginning to be global. For example, one user is in America and another is in China, both users still have access to the same DeFi service and network.

Even so there might be a slight difference due to local regulations. But the point is, technically most DeFi applications are available to anyone as long as they have an internet connection.

The fourth difference from conventional banks that have complicated licenses, DeFi is the opposite, anyone can participate and use it. Users can interact directly with smart contracts from their crypto wallet.

The next difference is that users of this technology can be more flexible, including if they don't like the appearance of the Dapp interface, they can use the interface from pohak when or even build their own display. Smart contracts such as APIs can be used by anyone to build applications.

Finally, the difference between DeFi and others is that the application can be arranged by combining other DeFi products like playing Lego

In brief, here is the difference between conventional banks and DeFi.

Bank

• has central authority
• less transparent
• not global
• complicated permission if you want to join
• less flexible

DeFi

• has no central authority
• transparent
• global
• simpler permission
• flexible

DeFi is now one of the fastest growing sectors in crypto. To date, users have put more than $ 600 million in crypto into this smart contract.

Impact of Decentralized Finance

Global access to financial services
One of the motivations for the construction of DeFi is that there are still many people who lack access to financial services due to various constraints such as the long distance between economic activities and service providers.

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

In this decentralized system, traders in world financial companies will have access to a variety of levels, for example to groups of farmers in countries.

Cheaper cross-country payments
Decentralized finance eliminates intermediaries so remittances are cheaper. In the current system the cost of sending money between countries has a remittance fee in the range of 7%, but through this decentralized service these costs can be reduced to below 3%.

Sensor-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 having 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.

Increased privacy and security
In decentralized finance, users have direct access to their accounts and can make transactions securely without validation from the central authority, for example the central bank.

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

Popular DeFi Products

The most popular and rapidly growing DeFi product or sector is borrowing and lending platforms. This sector is similar to banks, users deposit money and get interest from other users who borrow their assets.

However, in this case the assets are digital and intelligent contracts that connect lenders with borrowers, impose loan terms, and distribute interest. And it all happens without the need to trust one another or an intermediary bank.

Then by cutting out intermediaries, lenders can get higher returns and better understand risks thanks to the transparency provided by the blockchain.

A token called stablecoin is also important for the DeFi ecosystem. You might get the impression that all cryptocurrency is volatile. However, stablecoin is a token that is designed to hold a certain value and is usually pegged to fiat currencies like the US dollar.

For example, DAI is a stable coin that is pegged to the USD and is supported by ether (ETH). For each DAI, there is $ 1.50 of ETH locked in a MakerDAO smart contract as collateral.

Another type of popular DeFi application is what is called decentralized exchange, or in short DEX. DEX is a crypto currency exchange that uses smart contracts to enforce trading rules, carry out trade, and handle funds securely when needed. When you trade on DEX, there are no exchange operators, no registration, no identity verification, or withdrawal fees.

That's the explanation about DeFi or Decentralized Finance. Basically this system is focused on building financial and financial services that are independent, separate from the traditional financial system that is fixated on government policy.

This will allow more financial systems to reach more people. DeFi so far is indeed not yet familiar to the world community because not all people have been educated by this system and blokcchain.

But over time DeFi will be increasingly known and expand its reach which could have taken over the traditional financial system controlled by the government or a handful of companies to banks.

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