Decentralized finance (DeFi) is an open monetary system built on blockchain technology that is decentralized and immutable. One of the motivations of establishing the Decentralized Finance system is that there are still many people in the world who lack access to financial services. Although the current conventional financial system plays a role in building wealth for the world's population, it has not yet touched the masses of the lower classes.
Decentralization means there is no single point of failure, because the same record is stored on multiple computers / nodes over a peer to peer network. Due to the nature of the permissionless blockchain network, it is open to anyone, regardless of how many funds they have, where they live. Unlike banks or payment companies that can close accounts from customers who do not meet the requirements, the blockchain character is censorship resistant.
The following are the potential impacts of decentralized finance on the world:
1. Global access to financial services
With decentralized finance, anyone who has an internet and smartphone connection can access various financial services that were previously constrained by the system:
Status: there are citizenship restrictions, documentation
Wealth: Limits that are high enough to access financial services
Location: Long distances between economic activities and financial service providers.
In a decentralized financial system, great traders in world financial companies will have long-term access like farmers in remote areas in any country such as India or Indonesia.
2. Affordable Cross-Border Payments
Decentralized finance eliminates expensive middlemen and makes remittances cheaper for the whole world.
In the current system, it is very expensive to send remittances between countries with an average remittance fee in the range of 7%, through decentralized finance services, remittance fees can be reduced to below 3%.
3. Increased privacy and security
In decentralized finance, users who have direct access to their accounts (= their wealth_ and can make transactions securely without validation from the central authority (eg bank).
In the previous system or centralized finance, central institutions store all the wealth of their customers and the information is at risk also they fail to secure it.
4. Censorship-resistant transactions
In a decentralized system, transactions are immutable and the blockchain cannot be closed by governments, central banks or large companies.
In a dictatorial government situation (like many countries in Africa: Venezuela), users can transfer funds to decentralized finance to protect their funds. For example in Venezuela many people move their money to Bitcoin to protect their wealth from currency manipulation and unusually high inflation.
5. Easy use
In many cases, decentralized finance makes certain types of transactions easier than the complexity of a centralized system for similar services.
For example, with a decentralized system, mothers in Maluku can get investment from their business from other users in Brazil.
Defi or decentralized finance has the following categorization.
Open lending generally gets more attention than other categories in decentralized finance, mainly because of the skyrocketing use of Dai and other P2P protocols such as Dharma and Compound.
Decentralized lending has several advantages over traditional credit applications, for example:
By using a crypto loan such as MakerDAO, a person can get liquidity (cash) from his crypto without having to withdraw his ETH, but make it a collateral (collateral) and because his ETH stays there and is not disbursed, he does not need to deal with capital gains tax
In the example above you can see an example of a crypto loan that is disbursed in the form of a native Lend token and not in the form of fiat USD. in this case, you must pay attention to the issue of whether or not your liquidity is easy to sell and the volatility of the Lend.
Interest in salt, lend or blockfi is on average at 5-6% while the interest rate in Makerdao from 0.5% can be up to 19%
Identify liquidation risks in crypto loans
Crypto loans are usually intended for crypto holders who need cash but still want to hold the cryptocurrency and do not want to liquidate (exit) from the crypto. In the event of liquidation, the borrower is also subject to liquidation fees, for Makerdao at 13%, dydxprotocol 5% and compoundfinance at 5%.
The cash earned is certainly not 100% of the guaranteed crypto assets, an average of 50% less than the collateral (collateralization ratio) This means that if the value of the guaranteed ETH or Bitcoin has decreased sharply to 90% you must increase your collateral if you don't want your guarantee liquidated (sold / exited) to cover your loan automatically
Secured lending or loans that use cryptocurrency as collateral such as MakerDAO and Dharma are designed to depend on "trust minimization" or do not need trust provided by blockchain technology, to reduce the risk of default from borrowers without having to require intermediary / middlemen. This is done through basic cryptography with a verification method that is done through a public blockchain.
Stablecoin
Stablecoin has recently filled the market with a variety of new models for issuing tokens, auditing reserve funds and managing 1: 1 benchmarks. Stablecoin is a token issued on a blockchain and is designed to maintain a stable price benchmark with assets outside the blockchain, such as fiat money, or gold.
Stablecoin generally has 3 categories:
Conclusion
There are many types of participants, services and products provided in the DeFI and open finance ecosystems. Including custodians, infrastructure platforms, insurance and payments.
It's important that you do your own research and understand that DeFi products often involve high-risk assets in a platform that is full of uncertainties.
But decentralized finance has an interesting future regarding digital assets, blockchain and conventional finance that can connect to one another in an open and easily accessible environment.
FAQ DeFi (Decentralized Finance)
Decentralization is the process of distributing or distributing functions, power and equipment from a central location or central authority.
What is DeFi?
DeFi stands for Decentralized Finance. Including digital assets, protocols, smart contracts and dApps that are built on the blockchain.
What are the DeFi risks?
It is the responsibility of the user to keep his own private key confidential, using a hardware wallet and multi-factor authentication.
