In this post, I will explain in simple terms the meaning of DeFi and its advantages and disadvantages.
DeFi has been attracting attention as a new form of finance.
It's a technology related to cryptocurrency, but it's not easy to understand.
In addition, DeFi runs on the Ethereum blockchain.
Conclusion of this post
- DeFi is about decentralized finance that does not require a central administrator.
- Fees are low, and financial services are available to everyone, regardless of local boundaries.
- With the creation of DeFi, you will also be able to earn interest income with cryptocurrency
- DeFi is an intermediary financial application without a central administrator.
- Differences between DeFi and CeFi
- Low fees
- DeFi can use it regardless of region
- No need for a financial intermediary
- Users are responsible for any trouble
- Risk of the bubble bursting
Two things that will happen with the birth of DeFi
- DEX
- Yield Farming
Two services to be realized by DeFi
- Compound
- Maker
What is DeFi?
The term "DeFi" is becoming more common in cryptocurrency news.
Compared to Bitcoin and other currencies, DeFi is less well known, but it is attracting the most attention in the crypto-asset industry.
Here is an overview of DeFi in the following two sections
- DeFi is an intermediary financial app without a central administrator
- The difference between CeFi and DeFi I'll go into detail about DeFi!
DeFi is an intermediary financial application without a central administrator
DeFi is an abbreviation for "Decentralized Finance."
DeFi is based on the Ethereum blockchain, but it is a more advanced version of the blockchain technology, and it can manage financial assets autonomously.
In other words, it does not require a centralized system to manage financial assets as financial institutions do.
DeFi's blockchain technology will also enable complex operations, transactions, and transfers of virtual currencies.
"It's something that could take the cryptocurrency to a whole new stage!"
Differences between DeFi and CeFi
CeFi is the counterpart to DeFi, and is entirely different in nature.
CeFi is an abbreviation for "Centralized Finance."
CeFi is a traditional financial service that involves a centralized administrator to run the service like a bank or cryptocurrency exchange.
As mentioned earlier, DeFi does not have a centralized administrator to run the service.
Also, CeFi is a highly transparent service where cryptographic assets are handled by financial institutions and exchanges, while DeFi uses blockchain technology to allow free verification and viewing.
"This means CeFi and DeFi are fundamentally different things!"
Advantages of DeFi
The advantages of DeFi are as follows
- Low fees
- DeFi can use it regardless of region
- No need for a financial intermediary
I will explain them in order.
"Here's a closer look at the benefits of DeFi!"
Low fees
DeFi is likely to have lower fees than a centralized system managed by a financial institution.
In the case of a centralized system, extra intermediary fees are incurred because the financial institution needs to act as an intermediary.
Since DeFi uses blockchain, there is no need for a financial institution to act as an intermediary. The parties involved can transact directly with each other, and there are no unnecessary fees.
"That's the benefit of no unnecessary brokerage fees, which translates into lower commissions!"
The absence of commissions also increases the possibility of receiving a higher interest rate when lending funds through DeFi.
"With bank deposits nowadays, interest rates are low."
DeFi can use it regardless of region
With DeFi, there is no intermediary financial institution and no unique screening process to open an account.
There are approximately 1.7 billion adults worldwide who do not own a bank account as of 2018.
Even those who cannot use traditional financial services will use financial assistance regardless of where they live if DeFi eliminates regional barriers.
"The beauty of DeFi is that all you need is the Internet to use it!"
No need for a financial intermediary
DeFi, which allows parties to communicate with each other and transfer money directly, does not require the intermediation of financial institutions.
In the past, when transferring money, it would have been necessary to go through a financial institution such as a bank, but with DeFi, the parties can transfer money directly through the blockchain.
Therefore, as mentioned above, fees are lower, but transaction time is also significantly reduced.
"What is difficult to achieve with existing financial systems can be done!"
Disadvantages of DeFi
So far, I have discussed the advantages of DeFi.
Although DeFi has many attractive advantages such as low fees, there are naturally some disadvantages, so if you want to use it, you have to be aware of the weaknesses.
The disadvantages of DeFi are as follows
- User's responsibility if trouble occurs
- Risk of the bubble bursting
I will explain them in order.
"You have to understand the disadvantages!"
Users are responsible for any trouble
With DeFi, any trouble while using the service due to system failure is the user's responsibility.
When a financial institution acts as an intermediary, the operator is explicit, and the compensation system is solid, but DeFi has no compensation system because there is no financial institution.
"So be careful, because if any losses occur, the responsibility lies with the users themselves!"
Risk of bubble bursting
As mentioned above, DeFi is a system attracting attention in the crypto-asset industry, but it has only been in existence for a short time.
There is a risk that DeFi's bubble will burst due to the excessive attention it is receiving despite its short birth and lack of a credible track record.
You should collect information on DeFi as needed.
Two things that will happen with the birth of DeFi
"What will happen with the birth of DeFi?"
The following two things are said to happen with the birth of DeFi
- DEX
- Yield Farming
Let's take a look at what each of them can achieve.
DEX
DEX is an abbreviation for "Decentralized Exchange.
It is an exchange managed and processed by "smart contracts," a blockchain program that does not require a central administrator like a financial institution.
At its birth, DEX had few users due to the small number of issues and flaws, but with the birth of DeFi, the market has gained depth, and the number of users continues to grow.
With DEX, there is no need to deposit cryptocurrency to an exchange, and parties can trade directly with each other through a wallet.
Yield Farming
"What's yield farming?"
Yield Farming is a new way to manage virtual currencies where you can receive interest and fees in return for lending your crypto assets to a DEX or other financial institution.
When you deposit money in a financial institution, you receive interest based on the interest rate, but no such investment method exists for virtual currencies.
With the birth of yield farming by DeFi, the above investment method will become possible for virtual currencies.
You could call it a cryptocurrency version of receiving interest through interest rates.
"Yield means yield, and farming means farm!"
So in this way, DeFi can also create a new monetization mechanism.
Two services to be realized by DeFi
DeFi Services
What kind of services will be created by DeFi?
The following two services are said to be realized by DeFi
- Compound
- Maker
Let's take a look at what each service is.
Compound
The Compound is a cryptocurrency lending service that was created in 2018.
A lending service means a service that lends and borrows, and Compound brings together buyers and sellers who are willing to trade.
Compound allows yield farming, which means that you can earn interest income in return for providing liquidity by lending out your crypto assets.
In addition, depending on your usage record, you can earn a governor token called "COMP," If you use it well, you can earn price margin profit.
Maker
Maker is a service that generates "DAI" that can be exchanged over the Internet for people who cannot open bank accounts or are restricted from exchanging US dollars.
DAI is a staple coin linked to the US dollar and can be freely accessed online to exchange assets.
Summary
I have provided an easy-to-understand overview of DeFi, its differences from CeFi, and its advantages and disadvantages.
I'll summarize three essential points at the end.
- DeFi is a decentralized financial system that does not require a central administrator.
- Fees are low, and anyone can use financial services beyond local boundaries.
- With the birth of DeFi, you will also earn interest income with cryptocurrency.
DeFi has only been in existence for a short time, and there is a risk of a bubble bursting as a result of overheating due to a lack of credible track record.
Since there is no compensation and you are responsible for any problems, it is essential to keep these in mind when using this service.
