What is DeFi and why do we need it?

The term decentralized finance or better known as DeFi lately is being discussed a lot in the financial world. The common defi development concept is implemented in financial services such as lending, investing, insurance, trading, payments, and wealth management on the blockchain. The ecosystem built by DeFi is a decentralized system that provides a public blockchain network. More specifically, DeFi is a software-based system designed on a blockchain that allows sellers, buyers, borrowers, or lenders to interact peer to peer. Due to the decentralized system, the DeFi system no longer requires an ID card, social security insurance number, or proof of complete address to be able to carry out financial service transactions.

The problem with centralized finance

The development of the concept of decentralized finance (DeFi) is triggered by the limitations of the traditional centralized financial system. In a centralized financial system, most people can’t have complete control over decisions about what to fund and get a meager profit on the business they do. This is the problem with a centralized system to promote and increase the level of prosperity of the people in a country. In general, the financial system is a global economic center that is not open. In developing countries and even in developed countries, the funding system only focuses on large corporate entities. This causes the lower middle class to only have a very small percentage in the capital and stock market.

When you want to invest, you will give control to the custodian bank, financial manager, or other intermediaries over the assets that you own. This is indeed profitable because your financial management will run well. However, on the other hand, you will not gain complete control over the assets you own. In addition, many serious problems are often faced in centralized financial systems such as counterfeiting, fraud, data leakage, and accessibility issues.

Incomplete decentralization

The initial concept of a decentralized financial system (DeFi) was facilitated by the birth of Bitcoin in 2008 by Satoshi. Without centralized control and intermediaries, DeFi provides a reliable solution for building global peer-to-peer systems. This system allows each individual to gain complete control over their wealth assets. In addition to complete control, the DeFi system offers a financial system without fraud, forgery, and manipulation. The DeFi system also continues to implement transparent, reliable, and accountable financial transaction capabilities. However, in the early stages of the development of a decentralized financial system, Bitcoin and cryptocurrencies only decentralized digital money storage and did not provide access to a wider system of financial services.

Due to its open nature and no intermediaries, the decentralized financial system is also very likely to run into problems with existing financial laws and regulations. The transaction system on DeFi with an unlimited range can result in problems with regulation, namely problems in determining the guilty party when a financial crime occurs in the protocol, cross-border, and software.

The question of access

Every new concept of financial services appears to the public, there will be a major problem in terms of accessibility. Like Bitcoin and cryptocurrencies that require a high level of understanding to gain access. However, adaptation to a blockchain-based financial system is possible. This financial system will play a very crucial role in the coming years. The variety of available financial systems will make it easier for you to make decisions and control the assets you own. This will be realized well if it is also supported by a fair, open, and reliable financial system.

Decentralized financial system software and website services are developed based on the public blockchain and common technology standards that offer open access to the public. Explicitly, this DeFi application provides financial services for each individual in an open manner and is not inclusive for institutions so that each individual has greater access and control over their financial assets when compared to a centralized financial system.

Decentralized finance

In terms of the stage of development, the decentralized financial system is still in the early stages of development. The DeFi system has generated more than $40 billion in locked contract value through Q2 2021. This figure is the total locked value calculated by multiplying the USD value by the number of tokens circulating in the DeFi ecosystem protocol. This total value is very substantial and important to review the liquidity aspect in the cryptocurrency market. However, the obvious advantage of the DeFi system is that individuals have greater control over their assets.

In comparison, there are many banks and financial technology companies that promise a deeper experience in asset control for each of their customers. However, in reality, these banks and fintech companies still hold majority control of customer assets. Thus, from the aspect of speed and convenience in transactions, it still does not develop significantly.

In general, there are several tangible advantages to implementing a decentralized financial services (DeFi) system:

  • Optimal transaction speed and convenience: transactions based on open blockchain technology can be carried out more quickly, cost-effectively, financial contracts are robust, and the automation of wealth asset contracts is easy.
  • Full control of assets: every individual who uses the DeFi platform will have full control of his assets in the blockchain ecosystem with the presence of a private key without going through any intermediaries.
  • Transparent and reliable financial services system: principal and user risk is very low due to increased price transparency and market efficiency in the blockchain. Every data and information regarding transactions is strictly regulated by the DeFi protocol in an accountable and reliable manner.
  • Flexibility in contract arrangement: every contract transaction on the DeFi system is carried out through a smart contract rather than a specific individual or institution. This results in a financial system that is more personalized, broadly constrained, and also secure.

Viewed from the perspective of the future, the application of the DeFi service system will continue to grow and develop. This will be a very strong attraction to get more users, both users who are already familiar with the blockchain system and new users. Some of the advantages of the previously mentioned DeFi system will be more developed and more interesting to obtain.