What is DeFi?
Decentralized Finance, or DeFi, is a system that aims to provide open financial services or open source, without permission, transparent and available to everyone without any centralized authority.
This can be done by DeFi because of the smart contracts technology behind it. It can allow developers to build much more sophisticated functionality than just sending or receiving digital currency.
DeFi can be a global alternative to every traditional financial service in use 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.
Although it can be accessed openly, users still have full control over their assets by using decentralized applications, or Dapps. This app allows users to create stablecoins, lend money, and earn interest on crypto assets owned.
Users can also take out loans, exchange assets, and buy long-term or short-term assets to implement advanced and automated investment strategies.
DeFi Advantages
No middleman
If traditional banks have intermediaries to make transactions, then DeFi is the opposite. The blockchain technology that DeFi uses doesn't require that, so transactions can be done quickly. Users can also take control of the assets or funds they own and monitor them for changes.
The service will not be closed.
At the bank, if there is a crisis or problem, the service may be closed and customers cannot access the data or funds they have. But in DeFi, this is not possible because the financial services in decentralized finance are installed on top of the blockchain. So the recorded and scattered data consists of thousands of nodes, which makes a potential shutdown almost impossible. User data remains secure as it has multiple copies spread across the network.
Ease of access
In 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 access to financial services in low-income areas to gain access to financial services provided by DeFi.
Reduce costs
DeFi can reduce transaction costs, especially for digital assets, because it does not use intermediaries, so users do not have to pay additional fees for transactions.
The distinction between DeFi and Conventional Banking
The first thing that distinguishes DeFi from conventional banks is the management. If conventional banks are managed by institutions and employees, DeFi writes all the rules in code in smart contracts, which are then propagated into the blockchain, and later DeFi can run 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 public but under a pseudonym. So, even though it is very transparent, users still have privacy.
While conventional banks are not global in nature and are limited to one country, DeFi has been designed to be global from the start. For example, if one user is in America and the other is in Indonesia, both users still have access to the same DeFi service and network.
The fourth difference from conventional banks that have complicated licenses is that DeFi is just the opposite; anyone can participate in and use it.
The Effects of DeFi
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 the long distance between economic activities and service providers.
With Defi, this can be overcome. Even for people with low incomes, they can still access financial services freely as long as they have an internet connection and a smartphone.
In this decentralized system, traders in the world's 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 between countries 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, the fee 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 corporations. In countries that are experiencing a crisis or have 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.
Better privacy and security
In decentralized finance, users have direct access to their accounts and can make transactions securely without validation from a central authority such as a central bank.
It is quite simple 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, businesses in Indonesia can get investment and capital from users in other countries.
Summarize
Decentralized Finance (DeFi) aims to provide open financial services or open source, without permission. Users can access savings, loans, trade, insurance, and others using only a smartphone and internet connection. Smart contracts technology allows developers to build much more sophisticated functionality than just sending or receiving digital currency. Unlike conventional banks, which are managed by institutions and employees, DeFi can run itself with little or no human intervention. In this decentralized system, traders in the world's financial companies will have access to various levels, for example, to farmer groups in Indonesia or other countries. Users have direct access to their accounts and can make transactions securely without validation from a central authority such as a central bank.
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