In the world of digital finance, there are trends that emerge and die off quickly, many projects have broken right from after moment zero. Among those e-finance ideas, DeFi has become an investment trend that is interesting by bringing huge returns to investors.

Join us to learn about DeFi and the investment opportunities it offers with this read.

What is DeFi?

Initially, let’s come to DeFi terminology to better understand this type of finance.

DeFi refers to a decentralized finance platform where markets or financial instruments are decentralized. In a word, this concept leverages the power of Blockchain to be decentralized and transparent to create an open finance. The term “open finance” of DeFi is created by the “Non-Custodial” feature. In DeFi’s open finance, everyone can access and use it anywhere, anytime without being controlled by any centralized individual or organization. 

In contrast, in CeFi – Centralized Finance, certain authorities will control everything and users are forced to follow the operating rules that the authority makes. Therefore, CeFi will have certain limitations in terms of transparency, credibility, centralization of power… The above limitations do not fully reflect CeFi, but they demonstrate that Centralized Finance needs to find solutions for the issues. In that context, DeFi was born with the goal of overcoming the limitations of the CeFi model. That is also the reason that helps DeFi stand out in the financial investment scene.

The essence of Decentralized Finace

DeFi is operated and applied blockchain technology. Therefore, it takes advantage of the advantages of blockchain:

Accessible

With the traditional financial model, users have to spend money to take advantage of the ecosystem’s resources. For example, a person who does not have the opportunity to do many transactions with a bank will not be able to become a VIP customer of that bank. Therefore, ordinary customers who come to the transaction bank will not be able to enjoy the privileges only available to VIP customers. 

As for DeFi, you can fully access the ecosystem that Defi brings without spending any money. All users are treated equally and there is no need to register with complicated procedures. The orders for the participants’ money transfer are the same, applied based on a pre-established module base. At DeFi, there will be no distinction between who owns more cryptocurrencies or who has less like traditional banks.

Decentralized

In the DeFi model, there is no governing authority, but every user has the right to make decisions. Because there is no organization or agency involved, all costs to be paid to 3rd parties are significantly reduced.

Interactive ability

This model is community-oriented, so the interoperability between people in the DeFi ecosystem is very high. For example, investors on the exchange can exchange with each other to learn from experience. Or some investors can completely create a certain cryptocurrency community and bring profits to the community.

No entrustment

Users do not need to entrust assets to any third party. The role of controlling the DeFi agreement is Smart Contract, which maintains the rules of the “game” in the DeFi market.

Privacy

Privacy is characteristic of any model using Blockchain technology. You can have a crypto wallet that doesn’t need to be identified. You are even allowed to make a money transfer without knowing who the sender is and who the recipient is.

Transparency

With a decentralized financial model, any user can check every transaction through the money transfer transaction code. The factors that affect the field will be limited because all activities are recorded and public on the system.

Applications of DeFi

Although DeFi is often placed in the field of Blockchain and cryptocurrency, the scope of application of this model is much broader than just cryptocurrencies.

Yield farming

Yield Farming is a term used to refer to people trying to make more profit from the cryptocurrencies they own. A similar action on yield farming can be imaged that if a farmer owns a piece of land, he or she will rent out this land for a profit. In DeFi space, the coin owners will lease coins to participate in the buying and selling market to fluctuate the price of a certain coin.

Margin trading

Margin Trading is a term often seen in the Forex market or stock investment. In the cryptocurrency market too, you can trade more than you have in the exchange by borrowing the exchange’s assets and paying interest when closing the trade and returning the owned asset.

Decentralized Exchange

At decentralized exchanges, you can trade with others yourself without the support of an intermediary which helps users to reduce costs. Because the exchange does not control your money, even if a hacker can hack the exchange, it will not be able to get the money.

Stablecoins

Without DeFi, it would be more difficult to bring Crypto as collateral to issue Stablecoins because of the need for many intermediaries. In contrast, with DeFi, Crypto will be collateralized automatically and quickly by smart contracts.

Peer-to-peer lending platform

With the loan model when applying DeFi, there are no intermediaries. As a result, the amount of money that the lender collects will be higher, at the same time, the interest of the borrower to pay will also be lower.

The potential of the DeFi model

DeFi has a growing pool of resources over time. Within a year, DeFi’s total market capitalization grew 12 times and opened up many opportunities for investors. In the future, DeFi will change and greatly affect the centralized financial model in many countries.

Many investors are growing tired of the centralization of the traditional financial system. They want freedom and control, especially those who do not have access to banking and finance. Therefore, investors will tend to turn to DeFi to manage their personal finances on their own without depending on a third party or other centralized organization.

But DeFi to completely replace CeFi is unlikely due to many subjective as well as objective factors. However, DeFi will certainly create a parallel playing field with CeFi, while focusing on the problems that the CeFi model does not solve.

Risks of DeFi

Although Smart Contracts are always rated as highly secure, good hackers can still find holes to penetrate. Therefore, DeFi has been trying to improve the security of Smart Contracts.

In addition, the governments of many countries that have negative views on Blockchain and DeFi views are also significantly affected by these thoughts because of concerns about the impact on their ability to control the financial industry. DeFi not only affects personal interests but also affects the stability of a country. Therefore, it is not easy for DeFi to gain legal recognition in the host country. Even these countries can ban all Blockchain related activities like China is doing.

Thus, we have an overview of DeFi and the development potential of this system in the context of financial investment. Surely this will be a new investment direction that will become a trend in the future and bring many benefits to investors. Hopefully, you will dig deeper into DeFi when investing in the crypto market.

If you still have doubts and want to know more, Blockchain Hanoi will be hosting an AMA session with Vesper Finance on December 8th, 2021. Vesper Finance is a DeFi platform creating products that simplify digital asset growth for individuals and organizations. This AMA session is called  “Everything about DeFi Staking“. Join us, come to learn, and participate in the giveaways!!!

About Blockchain Hanoi: Blockchain Hanoi is a tech community hub formed by a group of inspiring technologists who works together towards an inclusive and conscious future; the community leaders organize monthly events to talk about the different advances of the industry, the basics to attract beginners or interested people, and to foster networking between entrepreneurs, talent, and investors.