“A financial world that is not centralized and reliant on banks”
DeFi or Decentralized Finance?
To understand the origin of “DeFi”, it is first important to get basic knowledge about Bitcoin the world’s first digital currency. Bitcoin is also known as the gold of the crypto world and its value is based on the mutual valuation of Bitcoin investors, as the gold market, but only without the paper gold. The Bitcoin price is purely a result of demand without paper manipulation.
Bitcoin was created as a digital currency without an “intermediary” for transactions because the creators did not trust the financial system. Why do we need someone to approve every transaction we make?
The intermediary and service provider in the financial world as we know it is the bank, which we are trained to trust from an early age. Cryptocurrency transactions are based on the idea that all intermediaries, whether banks, states, or policymakers do not intervene, approve, freeze, or prohibit us from owning the property.
So how does the transaction take place?
Bitcoin is based on blockchain technology. A technology that divides data into blocks and connects them into a chain.
When transactions take place on the blockchain, the transaction data is recorded and distributed in a shared copy to everyone on the blockchain. This provides transparency and traceability. Fraud or falsification of information is difficult.
The function of Bitcoin is to be an exchange currency, which means that Bitcoin can be a transaction medium between two parties. In the world of digital assets, technology is at the heart of it. Investors and developers believe that technology will be the answer to the future of global finance. Blockchain’s more “advanced” technology is what is known as a “smart contract.”
One example of a smart contract is “Ethereum.” Ethereum is a blockchain technology that allows developers to dive into the realm of complex programming. Alternatively, you can connect other platforms to the Ethereum blockchain to create your own business platform. For example, the art website NFT is also one of the platforms that work on Ethereum. The medium of exchange is Ethereum coins.
On the financial side, it is called DeFi or decentralized finance. If the currency was transferred without an intermediary, other transactions would not require an intermediary either, such as borrowing money or exchanging currency. All it requires is a wallet and the code or address where the currency is to be sent.
DeFi platforms run on a trusted blockchain (smart contract) code or executable code. If the code says that only we, the owners, can deposit or withdraw our currency, then there is no way for the owners of the DeFi platform to steal or withdraw our currency.
The real-world application of DeFi is enabled by the world of crypto financial transactions. People who hold cryptocurrencies can perform financial transactions on the platforms.
A popular way to invest in the DeFi space is to deposit stable coins or digital coins whose value fluctuates in major currencies of the world (1 USDT crypto coin = 1 USD). This method can bring an interest return of 7-20% per year which is, of course, many times more than bank deposits.
Besides, DeFi can do much more and we will probably see more in the future.
Still, the world of digital assets like DeFi is risky and not yet regulated. If hackers attack, we could lose our assets without compensation. Since these are open source platforms, many developers only focus on business development and neglect cybersecurity.
However, DeFi offers the opportunity to break the monopoly of the current financial system and give the power over their assets back to the individuals.