What is Decentralized Finance (DeFi)?

In recent years, people are increasingly interested in Cryptocurrency. The word that has been mentioned a lot is “DeFi”.

DeFi or Decentralized Finance is a system to provide financial products and services that does not rely on intermediaries such as bank. DeFi platform enables people to lend or borrow funds, transfer assets, or even stocks. It originated from the concept of creating a financial system without intermediaries.

The reason why intermediaries are required is because they need credibility, especially on financial transactions. People want to feel certain that their saving accounts are secured and they will receive the compensation as agreed. Trading also needs an intermediary because it can ensure that both seller and buyer won’t cheat or cause any damages to each other, while we have to pay the fees for such intermediary.

Back to DeFi again, as described above, it is the service provider that does not rely on intermediaries, so the transaction fees are decreased but how can we feel certain that we are not being taken advantage of? To solve this problem, Blockchain system and Smart Contract are being used in doing transactions to ensure that there won’t be any cheating.

In commercial meaning, the Smart Contract is used as a contract between buyer and seller. It specifies conditions, agreements and rules that both parties must comply with. To be more concrete, imagine when you buy products via online channel, you do not know who the seller is and you might probably be cheated. Therefore, an agreement is created to make sure that when you order a product and do the payment, such amount won’t be transferred to the seller until the product is delivered to you. Using the Smart Contract can help you do financial transactions with more confidence whether money deposit, trading, and investment.

Now let see the benefit of DeFi. Because it uses codes to write conditions which are embedded as open codes, meaning that we can verify the codes on the Blockchain. People all over the world can access to the system because it does not distinguish which country the codes belong to, so just having a smartphone connected to the Internet, you can do financial transactions faster and more convenient anywhere and anytime you want. At present, DeFi is being used as follows.

  1. Lending with the concept similar to banks. It receives deposit amount and gives loan to people. Depositors will get the return from the profit of loan. For example, if you have a cryptocurrency but you have no idea how to deal with it, you can just deposit your cryptocurrency to earn interest.
  2. Stablecoins caused by the intention to maintain its value or to change the value at minimum without meeting market demand. Basically, stablecoins were created for investors who do not like fluctuation of cryptocurrency.
  3. Decentralized Marketplace is where people can trade their assets without intermediaries and no need to verify their identity. With its low maintenance, money transfer fees are lower than usual.

In the future, there might be more and more new cryptocurrencies and Thailand may create its own currency too. These technologies are interesting and everyone should learn to keep up-to-date for the future. Anyway, investment is risky so you should carefully study the information before making a decision to invest.