What is DeFi: Definition, Benefits, and Challenges

What is DeFi - Decentralized Finance

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Definition of DeFi (What is DeFi)

What is DeFi? For people who are in the world of cryptocurrencies based on blockchain technology, the term Decentralized Finance – DeFi is familiar. Decentralized Finance itself or DeFi is an open and transparent financial system based on blockchain technology.

DeFi itself was created to make all people in the world can be touched by the financial services that are already available. In other words, it will be easier for the public to access existing financial services.

This DeFi service allows people to connect with financial and banking institutions around the world to get financial services. In principle, the use of DeFi is the same as when people access financial services through financial institutions or conventional banking.

People are able to access various kinds of financial services, such as trading, lending, investing, wealth management, payments, and insurance based on blockchain technology.

It is said that the DeFi service is able to connect the public with financial institutions without a third party intermediary. In addition, the public can also access financial services at no additional cost. This system will be able to minimize costs and provide opportunities for everyone with low incomes to get wider and affordable financial services.

The application that becomes the reference or basis for using DeFi is a smart contract or smart contract. A smart contract is a kind of small application that is run by many computers in a network that is distributed in such a way and stored in a ledger or blockchain ledger.

This smart contract minimizes human intervention in its use. In addition, the security level of smart contracts is arguably high. Usually, any changes in a smart contract can be verified by anyone using deterministic execution. With minimal human intervention, smart contracts can be said to be very transparent and have minimal risk of manipulation and intervention.

However, that doesn’t mean that smart contracts can’t be hacked by hackers. In several developed countries, skilled hackers have succeeded in finding ways to manipulate and break smart contracts in blockchain technology. However, the hacking process will remain easily known through a well-integrated system in blockchain technology. So, even if the system can be breached, the hackers will be immediately traced to their whereabouts and identity.

In the DeFi system, there are at least five layers or layers that describe the function of DeFi itself. Each layer in the DeFi system also has different functions in processing transactions and services that occur in the DeFi system. Here are five layers or layers in the DeFi system:

1. The Settlement Layer

The settlement layer has two main functions in a DeFi system. The first is the function of storing proprietary information. While the second is the function of ensuring the conformity of changes to the rules set by the network. This layer consists of the blockchain and its native protocol.

2. The Asset Layer

The asset layer contains native protocol assets and additional tokens that are adapted to a blockchain-compatible token standard. In addition, this layer also consists of all tokens issued in the settlement layer.

3. The Protocol Layer

The protocol layer has a main function, namely providing specific standards for the delivery of several financial services, such as derivatives, debt markets, decentralization, and on-chain asset management. Usually, smart contracts are used at this layer as the means used by the users.

4. The Application Layer

The only function of the application layer is to make individual protocols linked to user-oriented applications that are also created in this layer.

5. The Aggregation Layer

This layer allows blockchain users to be able to combine information in a relevant, clear, and concise manner. In addition, users can also connect multiple protocols simultaneously. To do these two things, tools are usually provided to compare and assess services.

In addition, this layer serves to form a platform that has a focus on users who are connected to several applications or protocols.


Benefits of Using DeFi

The use of the DeFi financial system seems to have several benefits for society. So, what are the benefits of DeFi for today’s society? Here are some of the benefits of the DeFi financial system for society:

1. Open

The DeFi financial system is very open to anyone who wants to access financial services. This is because, according to data from the World Bank, 1 in 5 people in the world does not have an account.

This means that there are still many people who do not have good access to financial services. This condition will make it difficult for these people to access various financial services, such as opening bank accounts, borrowing funds, and saving funds.

Thus, the existence of a DeFi system will reduce people who do not have access to financial services. In addition, the public will find it easier to access financial services with a variety of options.

2. It doesn’t have to be in a certain currency

People who want to use the DeFi system will get a service that allows them not to have to save their money in a certain currency. People can save their money in other forms. For example, people can store their money in the form of Ethereum tokens or other crypto tokens. Of course, these tokens can be cashed in physical form later.

3. Ease of access

DeFi allows all parties, both users and creators, to easily access all forms of DeFi services. The open source nature of some of the DeFi protocols allows people to create their own DeFi Apps for the smooth running of financial services.

4. Very transparent

The DeFi system allows the public to access all data and information in the system openly. This aims to maintain the accountability and sense of responsibility that each user has. With this transparency, transactions using DeFi will feel more secure and comfortable.

5. Minimal cost

The absence of intermediaries between the community and financial services makes the costs to be incurred by the community very minimal. Thus, people can save more on the funds they have to access various financial services.


Deficiency

Everything in this world has its advantages and disadvantages, including DeFi systems. Although the DeFi system has several benefits for its users, it also has drawbacks that people need to be aware of. In your opinion, what are the shortcomings of DeFi that people need to pay attention to? Here are DeFi drawbacks to note:

1. The appearance of the application is not good

Blockchain applications have slower performance compared to other similar and centralized applications. This has the potential to discourage people from using blockchain. Thus, DeFi application developers need to consider developing and optimizing their products.

2. Vulnerable to user error

The loss of an intermediary in the DeFi system apparently presents another risk in managing the DeFi financial system. The role of intermediaries is shifted to the respective users making the risk of error even greater.

Moreover, DeFi products that are installed on top of immutable blockchain applications will be increasingly difficult to minimize errors made by users in the DeFi system.

3. Not yet used in bulk

In theory, DeFi does have many benefits for society in terms of access to financial services. However, DeFi has not been widely used by the public today. In addition, the public should strive to access DeFi.

This is due to the lack of public knowledge about DeFi. Thus, DeFi developers must first ensure that their products provide many benefits to society. If you have, then people will most likely start using DeFi.

4. Special adjustments

This is considered to be very difficult for the DeFi financial system. DeFi developers need to find a DeFi system that is best suited to a particular use. In addition, DeFi developers must consider the ability of users to use the DeFi system that has been created.

Thus, DeFi developers need to think about creating a DeFi system that can fit into a wider ecosystem than ever before and can be used by everyone.

That was a brief explanation of what DeFi or Decentralized Finance is. Hopefully this explanation can be useful for you and make you understand more about the blockchain world. Thank you and see you in the next article.

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Redaksi Media
Author: Redaksi Media

Cryptocurrency Media

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