DeFi - Decentralized Finance or Open Finance is probably the term that you have seen quite a lot recently. Yes, it can be said that DeFi is the "trend" today.
So what is DeFi? Whether this trend will "bloom soon" or will open a "new revolution", ... All will be in the following article of Blogtienao. Let's find out!
What is DeFi?
DeFi is an acronym for Decentralized Finance (decentralized / open finance). This is the term used to refer to the financial applications built on Blockchain.
More specifically, DeFi is the "way" to bring traditional financial products to a decentralized "land". There, the need for third parties is eliminated (or minimized), transparency and safety are emphasized, and costs are reduced.
Currently, Ethereum is the platform with the most active DeFi applications. However, this is not the only Blockchain selected by applications; besides there are Blockchain of IOST, EOS, TRON.
The purpose of the birth of DeFi
In traditional finance (CeFi - Centralized Finance *), you are confident the government will not print money all of a sudden so that inflation can soar; Banks will keep your money safe; and you often make a profit by entrusting your assets to a third party, which means giving control of your money to someone else.
* CeFi: Traditional finance / centralized finance
But surely you must agree that even if it is your money, but you can not completely control them 100%, regardless of any of the above.
DeFi was born to create an open financial system for everyone. There, people can have complete control of their assets.
To put it more broadly, DeFi is an ambitious effort to decentralize core traditional use cases of finance, such as transactions, loans, investments, asset management, payments and security. by using Blockchain.
So in the future, can DeFi replace CeFi?
Can DeFi replace CeFi?
Basically, DeFi will not be able to completely replace CeFi. However, they will provide more types of services that CeFi cannot provide.
- Assets will be replaced with cryptocurrencies
- Organizations, governments, companies will be replaced by Blockchain
- Wherever you are, you only need a device connected to the Internet to have access to decentralized finance.
As such, DeFi tools are certainly different from CeFi tools, although they provide similar financial services, such as loans.
Not only that, they also provide completely new financial services such as stablecoins (DAI, True USD, ...)
Main features of decentralized finance
DeFi is an open system, so anyone with a device connected to the Internet can easily access it.
Building a main block to help interoperability between blocks becomes simpler. From there, create an ecosystem that can expand and become diverse over time.
In CeFi, the provision of personal data is one of the “steps” that cannot be without; However, DeFi is completely different.
DeFi dapps will have a limited need for third parties (banks or organizations) for users to truly trust, because they are the custodians of their own assets.
Data on market activities will be displayed on an equal basis for all participants.
Core benefits of decentralized finance
- Real decentralization: Helps against censorship; allow all social classes to participate; and have a trusted third party
- Low costs, quick transactions, and fraud-free contracts: Thanks to the use of Blockchain as an infrastructure
- Users have complete control of assets without third parties: Do DeFi allows users to own private keys
- Increased transparency: This reduces the risks of personal gain or misinformation
How DeFi works
Operation on DeFi is not controlled by any organization or character, but instead are rules written in code or Smart contract. When they are deployed on the blockchain, DeFi dapps will operate automatically without human intervention.
Besides, this smart contract is completely public on the blockchain so anyone can audit it.
In addition, all trading activities are also public. However, due to privacy concerns, identities on transactions will be credited with a fake name by default.
Can decentralized finance be risky?
When it comes to the level of risk, DeFi dapps are currently the "places" most targeted by hackers. Among all the attacks, the most famous was the DAO which occurred in June 6.
In the incident, the hacker transferred a third of DAO's funds to another account by exploiting a vulnerability in encryption. This forced the Ethereum community to hardfork the blockchain to recover the lost money.
The most recent serious attack was the bZx protocol. Hackers attacked 2 times in a row and stole nearly 1 million USD.
This shows that the technology behind decentralized financial applications is still underdeveloped and has many gaps; facilitate attacks, damaging the reputation of technology.
Some popular DeFi applications
Decentralized lending platform
There are many different financial products based on DeFi. But, DeFi's fastest and most popular area of development is lending and lending platforms.
Similar to banks, users deposit and earn interest from those who borrow their money. However, in this case, the bank is no longer an intermediary but a smart contract that will connect the two users; enforce loan terms and distribute interest.
As you know, the cryptocurrency market is one of the highly volatile markets; Therefore, it is necessary to have a coin that holds value, and that is stablecoins.
Another popular DeFi application is the decentralized exchange (DEX).
DEXs are cryptocurrency exchanges that use smart contracts to enforce rules, perform transactions and safely handle funds as needed. Therefore, when you trade on DEX, there is no operator, no identity verification or no withdrawal fee.
There are also a number of other applications such as decentralized payment platforms (Lightning Network, Helis, xDai, ...); decentralized derivative products (Market protocol, Uma, ...)
Some crypto projects use decentralized financial systems
Why is the application of DeFi still not really popular?
That may be because DeFi has not yet overcome these major obstacles:
As is well known, assets in decentralized finance are in the form of cryptocurrencies. Therefore, the prerequisite is that cryptocurrency needs to become popular, if you want DeFi to be the same
Currently, the liquidity in decentralized finance is still low. Meanwhile, liquidity is the key to pricing in the financial industry. Consequently, most protocols cannot currently compete with competitors (in CeFi).
The products are mortgaged beyond
Because there is currently no credit score or common collateral, many products have to be over-mortgaged (sometimes as high as 150%).
This drawback reduces the leverage for professional traders; or the opportunity to gain access to capital that the user does not own.
This is one of the problems that users are most concerned about. If unfortunately the smart contract or blockchain layer has an error, it is difficult to detect because this technology is still too new.
Besides, by design, wrong or fraudulent transactions will be irreversible on the blockchain.
Potential in the future
Although there are still many problems, the DeFi ecosystem has grown 15 times in the past 2 years.
As of February 2.2020, about 3 million ETH has been locked in DeFi applications. In particular, lending products are the fastest growing and fastest growing industry.
This shows that decentralized finance really has potential. And if the weaknesses can be overcome, DeFi will quickly stand by CeFi in the future.
Hopefully through the above article, you have a clearer view of DeFi. If you have any questions or suggestions, you can comment right below the article.