What is DeFi? Overview of Decentralized Finance 

The world is always moving and so are the financial markets. There are always trends appearing, attracting the attention of investors. DeFi is one of the prominent trends from 2020, especially in the crypto world. Until now, its heat has cooled down, but its application and popularity have become more developed. If you are still wondering about decentralized finance, don’t miss this article!

1. What is DeFi?

The term DeFi is considered to have first appeared since August 2018 in a conversation between Ethereum entrepreneurs and developers, with the main issue being how to build an application based on open finance on Ethereum blockchain.

DeFi stands for Decentralized Finance. This is an ecosystem of financial applications built on blockchain.

What is DeFi – Image: cryptosiam.com

DeFi came about with the aim of overcoming the limitations of the CeFi model. Instead of being processed through a third party like CeFi, the operations of DeFi take place on Smart Contracts. Smart Contracts are agreements that automatically execute according to a specific set of rules without the need for a middleman. It can be accessed by anyone with an internet connection.

Learn more about the difference between DeFi and CeFi: Exploring the difference between DeFi and CeFi

2. Advantages and Disadvantages

2.1. Advantages

• Non-fiduciary:

DeFi eliminates intermediaries such as Banks, Governments, etc. Anyone can access financial products and services without having to be authorized or regulated by any organization. Make transactions anytime, anywhere, with no restrictions on time and space.

• Transparency:

Users can track the status of their assets. All activities are public on the system.

• Low cost:

Users will have lower costs than when using centralized finance because all costs through third parties are cut.

Advantages of DeFi – Image: cryptosiam.com

2.2. Disadvantages

• Legality:

Although DeFi is widely used, there are still many countries in the world that do not consider cryptocurrencies legal. If there is any dispute, there will be no organization to settle it.

• Liquidity:

DeFi’s liquidity is not as large as traditional financial systems.

In addition, DeFi services are tied to crypto-assets. So users need time to get in touch and understand how to use DeFi as it is different from using fiat.

3. Potential and Risks

3.1. Potential

DeFi is operating and developing as a “playground” in parallel with CeFi. Many investors are turning to DeFi to manage their personal finances on their own without depending on any organization.

DeFi’s potential – Image: icoviet.com

DeFi has the potential to revolutionize the financial industry, setting the stage for us to enter Open Finance. There are many comments on the potential of DeFi, which represents a positive view of the long-term trend in the future. 

According to David Puth, CEO of Center (the company behind USD Coin): “DeFi still occupies a position and has grown strongly since the early stages. And of course, the financial world will not be able to ignore the incredible potential of DeFi in the future.”

3.2. Risks

One of the barriers to expanding and growing DeFi is legitimacy. It is not easy for DeFi to gain legal recognition in all countries. For example, China has banned all crypto-related transactions.

Along with many opportunities ahead, DeFi still has potential risks as hackers are still looking for DeFi vulnerabilities to penetrate. Besides, the cryptocurrency market is also always volatile, affecting users’ investments.

Risks of DeFi – Image: thanhnien.vn

4. Some applications of DeFi

Decentralized Exchange (DEX)

Exchanges that allow users to trade digital assets without the need for an intermediary. Transactions are made directly between users’ wallets with the help of Smart Contracts.

Decentralized insurance

It can be crypto wallet insurance, smart contract insurance, loan insurance. These types of insurance help ensure the safety of users against possible technical and financial risks. It also makes the sending, processing and payment process safer and more transparent.

Derivatives

Derivatives are the names of decentralized transactions whose value depends on the volatility of the underlying asset. This asset can be a token or a cryptocurrency. Users will trade with each other based on the price of the cryptocurrencies, not directly owning or buying the cryptocurrencies. Derivatives trading on DeFi helps to reduce the risk of price volatility.

Decentralized derivatives – Image: cryptoleakvn.com

Stablecoins

Stablecoins are cryptocurrencies created to minimize the impact of price fluctuations, by attaching their value to a stable asset (e.g. currency, gold, silver, commodities, or another digital currency, etc.). As long as the asset maintains a stable value, the value of the user’s cryptocurrency is also stable.

With information about DeFi, hopefully this article can help you understand the overview “What is DeFi?”. Decentralized finance takes time to develop and perfect. Given the benefits that DeFi brings, whether it can completely replace centralized finance in the future, remains an unanswered question. The developers are still trying to fix the existing problems. So we can still hope for a bright future of DeFi because its potential is so great!