A Beginner’s Guide to Decentralized Finance
Just started in cryptocurrency, and feeling clueless about the many jargons used? No worries, we got your back. Introducing a beginner’s guide to decentralized finance (a.k.a DeFi), where we aim to simplify learning and inform you on things to keep in mind before starting DeFi.
DeFi is definitely the buzzword of the century for the crypto world. It represents an independent financial system which does not operate within the boundaries of a intermediary. But how is DeFi related to cryptocurrency? Well, cryptocurrency IS DeFi! Cryptocurrencies are virtual currencies secured by cryptography, meaning that they are almost impossible to counterfeit. And the technology supporting this feature is because of blockchain, distributed ledgers enforced by a network of computers. Imagine you are paying for a cup of coffee at your favourite café, with cryptocurrency like Bitcoin. Instead of getting your payment approved by Visa or Mastercard, a network of computers are actually the heroes validating your transaction.
Benefits of DeFi
So, why are cryptocurrency transactions gaining traction over the years? Futuristic and ambitious it may sound, there are three main benefits to a DeFi network:1. Transparency
All transactions are tracked, validated and cannot be manipulated. This means that DeFi has the ability to fend off money laundering attempts, as the crypto transaction history can be traced
Leveraging on blockchain technology, transactions can be relatively speedy and low-cost. It largely depends on the infrastructure the cryptocurrency is built on, and some examples of blockchain network such as the Ethereum network.3. Equality
While it is not the main market driving force, DeFi provides for worldwide participation regardless of social status. Not all economies are built equal – for instance, Zimbabwe has 557% inflation rate compared to 2020. This means that their local currencies are not reliable, and locals would have an extremely high cost of living. Cryptocurrencies allow for anyone on the planet to hedge against inflation of their local currencies, ensuring a fairer and more equal way of life.
In contrast, banks and governments are examples of a centralised financial system where regulations are put in place to manage risks, compliances and fraudulent money laundering. With these traditional intermediaries, they have the ability to influence the market. For example, the US Fed has implemented near-zero interest rates when the COVID-19 pandemic engulfed the world. It is an attempt to lower costs of borrowing and financing, all in order to stimulate economic growth amidst the chaos. On the other hand, when there is astronomical and uncontrollable growth, the Fed will then raise interest rates to prevent overheating of market. So, what’s the main driver for DeFi, when you have a centralised network which seems to manage the economy?
The main benefit of using DeFi over centralised financial system is that you have full autonomy and control over your owned crypto assets. In centralised finance, you place your trust on a third party intermediary to manage funds and execute professional services, such as payment gateway and validation. For example, handing your payment in fiat requires a financial institution like Master or Visa to approve of your credit card transactions, and users are at the mercy of such institutions in the way they manage their assets. Just last month, Amazon recently announced an increase of 0.5% in surcharge for payments made with Visa. What a bummer! Instead with DeFi, you are placing your trust on the blockchain technology, an infrastructure comprising of networks of computers are used to validate any transactions. This means that no third party financial institution have the ability to impose laws or regulations on the way you manage your assets. Sounds great, right?
Furthermore, another key benefit of DeFi would be the ability to utilise decentralised applications (DApps) built on blockchain networks to perform business services. For example, the ShuttleOne network provides business loans and global remittance services to allow companies to access financial services efficiently. DApps are revolutionary in changing the way we do business. In the case of ShuttleOne, they enable microloans to businesses which were previously exclusive to the privileged. With DApps, DeFi is definitely one of the key drivers of the future of work.