What is DeFi?
DeFi is the most discussed topic in blockchain sphere in 2019, almost all the time DeFi is mentioned in crypto sphere.
So what is DeFi?
DeFi is Decentralized Finance, known as: decentralized finance or distributed finance.
Decentralized finance refers to the application of various financial fields that develop in the open decentralized network., the goal is to establish a multi-level financial system, based on blockchain technology and crypto currency, to recreate and improve already existing financial system. In general, decentralized financial application includes these four categories:
1, Payment-payment type of decentralized financial application generally has its own digital currencies, that users can use to trade. It can also provide wallet address to allow users to hold these digital currencies. Because payment landing needs more aspects of conditional support, DeFi payment applications are not popular yet.
- Loan - decentralized loan is a core app that tries to decentralize the economy. The goal of decentralized loan is to democratize the lending process by allowing people to get loans from more money lenders.
- Stable coin – stable coin is an asset with stable price, suitable for fulfilling following functions: being medium of exchange, accounting unit and storage value. Compared to Bitcoin, Ethereum and other relatively fluctuating digital assets, Stablecoin is attrecting more and more attention in digital assets sphere due to its price stability.
- Decentralized exchange - decentralized exchange allows users to trade digital assets such as Bitcoin and Ethereum. Users only own private key, no account login system，
At present, there are thousands of DeFi projects, in addition to the four types mentioned above, there is also decentralized wallet, insurance platform, market forecast, ID verification that all belong to field of DeFi. We can see the early stages of the whole new industry, and that the entire DeFi ecosystem is now undergoing its flourishing period.
What are the advantages of DeFi over traditional finance?
- Wider global financial services: decentralized finance enables users to access financial services via the internet or smartphones. At present, the traditional financial sector has high requirements for users to enter, in terms of identity, wealth and geography has strict control. In decentralized financial system there is no difference between financial companies’ gold traders and farmers in remote areas in India, both of them can enjoy the same services, what makes users to have equal and democratic access to financial services.
- Economical and practical cross-border payments: in decentralized finance high fees for intermediaries are avoided, effectively reducing the cost of international remittances.
- Privacy and security improvement: in a decentralized financial system, users keep their property and can conduct secure trade without central authorities’ verification. At the same time, in the traditional financial sector the trusted institution is responsible for keeping the user’s property and information, if leakage happens the consequences cannot are unimaginable.
- No government control of transactions: decentralized finance ensures that transactions cannot be changed. Blockchain cannot be closed by centralized institutions. For example, in countries with poor governance or unstable political situation, people can use decentralized finance to protect their property.
So, why is DeFi developing relatively slow now?
Although DeFi has advantages, but the current development is still slow, and the threshold to enter is high, big amount of users doesn’t know much about it, so the number of people using DeFi is still very small.
On the one hand, the development of DeFi is under underlying public chain control.
The current DeFi project, mainly built on the Ethereum network. The current performance of Ethereum is quite outstanding, but there is still a long way to go before the bottleneck is passed by. In such case those DeFi projects with higher performance requirements, will be in a more awkward situation.
On the other hand, decentralized financial projects, compared to traditional financial products, are more difficult, have higher cognitive requirements for users, which might greatly affect Defi development speed.
In addition, the security of decentralized financial projects needs to be practically proved, and the trust of users needs to be accumulated continuously.
Nevertheless, DeFi project developers generally believe that DeFi will be an inevitable trend in historical development, in terms of improving privacy, fairness, asset security, reducing financial costs, promoting trust and other aspects with incomparable advantages. The problems DeFi faces in the initial stage, are very similar to the problems encountered in the early internet period. DeFi must pass through a necessary rough road to reach a distant place.