DeFi (Decentralized Finance) is becoming the hottest buzzword in the crypto world and in the blockchain industry. Not only in the financial aspect, but also in terms of investment, making profits based on DeFi tokens is also very interested in the community.
DeFi tokens x5, x10 have been priced in just a few weeks to a few months, which has sparked the interest of coin investors in Vietnam as well as in the world. So what is DeFi in the end? What is special about decentralized finance? How are its pros and cons?
The answer lies within the following article.
Understanding DeFi
So, what is DeFi anyway?
Decentralized finance (or simply DeFi) is an ecosystem of financial applications built on top of blockchain networks.
More specifically, the term Decentralized Finance can describe a movement to create a transparent, open-source, and permissionless financial services ecosystem that is accessible to all and everyone works without any central authority. Users will have full control of their assets and interact with this ecosystem through peer-to-peer (P2P) applications, decentralized applications (dApps).
The main benefit of DeFi is to make it easier to access financial services, especially for those without access to the current financial system. Another potential advantage of DeFi is a modular framework built on top of DeFi applications interoperable on public blockchains, able to create brand new financial markets, products, and services.
What are the perks of DeFi?
Traditional financial systems rely on intermediaries such as banks and courts to provide arbitration. Meanwhile, DeFi applications do not need any intermediaries or arbitrators. The code bots will specify how any possible disputes are resolved, and users maintain control of their funds at all times. This helps to reduce the costs associated with providing and using these products and creating a smoother financial system.
The implementation of these new financial services on blockchains eliminates one point of failure. Data is recorded on the blockchain and spread across thousands of nodes, making it difficult to censor or close a service.
Since frameworks for DeFi applications can be pre-built, implementing a framework becomes much less complex and much more secure.
This open ecosystem also has another great advantage that those who do not have access to any financial services have access to the ecosystem. Since the traditional financial system depends on middlemen looking for profits, their services are often not provided to low-income communities. With DeFi, however, these costs are significantly reduced and low-income individuals can also benefit from a wide variety of financial services.
Hindrances
- Poor performance: blockchain networks are inherently slower than centralized networks, and the applications built on them are also dominated by this. Developers of DeFi applications need to take these limitations into account and optimize their products accordingly.
- High risk of user error: DeFi applications shift responsibility from middlemen to users. This can be a negative aspect for many people. Designing products that can minimize the risk of user error is an especially difficult challenge when products are deployed on immutable blockchains.
- Negative User Experience: Currently, using DeFi applications requires additional effort from the user side. In order for DeFi applications to be a core element of the global financial system, they must provide users with some tangible benefit to encourage users to transition from traditional systems.
- Cluttered ecosystem: finding the best apps for a particular use can be difficult, and users must be able to find the best one. The difficulty isn’t just building apps, but how they can fit into the entire DeFi ecosystem.
Popular DeFI apps and services
Currently, there are many DeFi applications. These applications have been saving time and money for businesses and customers alike. In fact, DeFi platforms have already started to appear across most financial sectors.
Based on transparency, trustless, permissionless. DeFi creates financial services that give users easy access to payments, loans, loans, investments, and portfolio management with greater autonomy and fewer barriers.
In addition, programmers can build DeFi applications (DApps) on the blockchain to issue, store and manage their crypto assets. And, smart contracts bind irreversible agreements between two parties without the need for a middleman. From there, it makes the entire financial system transparent and safe.
Specifically, the current popular DeFi applications and services include:
- Lending Platform (decentralized lending platforms): Compound, MakerDAO, Cred, Dharma, ETHLend, Constant …
- Derivatives (Decentralized derivatives): Tokensets, Uma, dydx, Veil, Augur, Market protocol …
- Payments Platform (decentralized payment platforms): Omisego, Helis, Request Network, xDai, Connext …
- Stablecoin (decentralized stable currencies): DAI, Terra, Reserve, Ampleforth, Neutral USD, Paxo, True USD …
- Decentralized Exchange (decentralized exchange): Kyber Network, Ren, IDEX, Binance DEX, Bancor, Nash, 0x …
What future does DeFi hold?
The potential of the DeFi sector is perhaps unquestionable, based on the information and data mentioned in this article, we can see that decentralized finance will be the future of finance. World and it is the premise for us to enter Open Finance. When people hate the centralization of the traditional financial system, they want freedom, unregulated, and especially those who have no access to finance and banking, such as residents. African countries, for now, will tend to turn to DeFi to manage personal finances on their own, without depending on a third party or any centralized institution.
“DeFi’s goal is to rebuild the banking system around the world in an open, trustless way” said Alex Pack, managing partner at the $100 million crypto fund Dragonfly Capital. “You only get that chance every 50 years.”
Final Thoughts
Decentralized finance focuses on building financial services separate from traditional political and financial systems. This will allow for a more open financial system and potentially avert the habits of censorship and discrimination around the world.
This is an interesting idea, but there is still much room for improvement. Finding the use cases that best match the traits of blockchain is crucial for building useful open financial products.
If successful, DeFi will take power from centralized organizations and put it in the hands of the open source community and individual users. Whether that can create a more efficient financial system will be determined when DeFi is ready for mainstream implementation.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.
