After learning about the role of Blockchain in NFT in the previous issue, in this article, I would like to introduce you to another financial system that was established from Blockchain and Cryptocurrencies as well.
'DeFi' or 'Decentralised Finance' is a financial system that does not rely on financial intermediaries. In other words, our traditional centralised finance gives authority to banking institutions to be a point of central control. Every financial transaction must be processed through banking systems. Having reliable intermediaries ensures that our transactions are legally successful and we are not scammed.
To cut out those intermediaries means that we can freely process any transaction on our own through the DeFi system. We don't have to rely on and wait for a bank to do it. The question that you all might have is that if we remove the intermediaries that provide us reliability, what is it in DeFi should we place our trust in? The answer is blockchain. The DeFi system operates on a blockchain network. Being famous for its transparency, any transaction conducted on a blockchain network would be recorded immediately and the information would be stored in every computer in the network. If one wants to modify, they have to do it on every computer, which is barely possible if the network is big enough.
Every transaction processed on the DeFi system comes with self-executing codes called 'Smart Contract'.A Smart Contract code contains details of the transaction that would be stored on a blockchain network immediately after processing it. It is why DeFi can be almost as reliable as banking institutes. An example of DeFi use is the exchange system of cryptocurrencies operated solely on blockchain and without any banking intermediaries. There are many DeFi platforms available in the market. Each provides a different service, for example, MarketDao and Compound are lending and borrowing platforms. Uniswap and Kyber are decentralised exchange platforms (DEX).
DeFi is established after Bitcoin, one of the cryptocurrencies that are also based on blockchain. A group of developers foresaw that they could make more use of blockchain than just operating cryptocurrencies. So, they developed an open-source blockchain that allowed developers to put its ability to use. They also found the opportunity of blockchain-based decentralised finance. That is how DeFi generated.
One advantage of DeFi is, without intermediaries, we could freely process transactions worldwide. We could also speed up and reduce the cost of transactions, because every step is automated. On the other hand, without banking supervision, it is easier to conduct illegal transactions. Besides, with buggy Smart Contracts, investors can be tricked into a scam, just like the case of ‘DeFi100’. Therefore, careful research to reduce risks is more than necessary for those who want to start investing in DeFi. If there is a way to prevent those cons, DeFi could be a game-changer for the future of finance.