DeFining and Understanding Decentralized Finance
Can you imagine life without gadgets or the internet? Some of us can survive without technology but most of us cannot. We are all living in a generation where technology is essential, and it evolves from time-to-time. Technology has become part of our daily lives; from the time you wake up in the morning until you go to sleep at night. The use of phones, air conditioners, computers, television, and automobiles are all technology that we all consider as necessities.
In finance, technology is also important. In the finance world, some technology used are ATMs, security cameras, and alarms.
Technology gave birth to a unique and more accessible tool in finance. It is called Decentralized Finance or in short DeFi. But what is it? How did it start? What are its advantages?
As I searched the internet, I happened to find numerous articles about DeFi and its meaning. However, among all the articles that I read, the works of Camila Russo of CoinMarketCap and Keara Dowd of BizTech Magazine stand out the most for me. Their articles are easy to understand and contain helpful information about DeFi. I must say that these two articles are the best materials to use if you are planning to know more about DeFi.
But first, if you want to know the history of DeFi, you can check out the article Russo in CoinMarketCap. After I read about its history, I was amazed by how they managed to come up with the name DeFi. They also communicated through Telegram. Yes, Telegram, a social platform. They did not set a face-to-face meeting to talk about it. So, if you are curious, you are just one click away.
Moving on, let us continue discussing the meaning of DeFi. The word decentralized means it is controlled not only by a single entity but controlled by several entities. This only means that it is very transparent, and everyone can access it. Like in Dowd’s article, Bitkom’s whitepaper states that “Anyone can potentially verify the results”. However, even though it is easy and accessible to everyone, it does not mean that it is not safe. After I researched DeFi, I learned that it is a modern finance system. It is built by blockchain technology. According to Dowd, blockchain technology is a chain of online transactions saved as a shared ledger across numerous computers on a peer-to-peer network. This means they are not all stored in any one place, keeping these transactions protected from a central attack. It only means that decentralized finance is a system that is impossible to be hacked and very secure. However, I will not close the door to the possibility that someday it might get hacked. Especially that computers are also evolving, and more individuals are getting interested in cryptocurrencies. But of course, at that time, the security features of DeFi will also evolve. How can the hackers keep up?
So, what are its advantages? According to Russo of CoinMarketCap, the first characteristic which I consider as an advantage of DeFi is non-custodial. It means that people will have control over their assets and can transfer the value to another person without the help of any financial institutions such as banks. I guess it is good especially that the service charge of banks will just add up to your expenses. Also, you do not need to spend a lot of time to submit the required information or so on and wait for it to be processed. Indeed, banks should be prepared for how DeFi could affect them in the future.
The second advantage of DeFi is being open. It only means that in DeFi, there are no boundaries. Everyone in this world can access it. In short, Decentralized Finance is global. Just imagine that you are taking a vacation in Hawaii, then suddenly, you want to access your finance. Your officemate convinced you to invest in a certain platform. In this case, you can make use of some DeFi applications. These DeFi apps or platforms can make you access your finance anytime and anywhere in this world.
Transparency is another advantage of Decentralized Finance. Like what I have mentioned earlier, DeFi is very transparent. In DeFi, everyone is free to look and inspect the codes. You can verify and see how the application and protocols work. Also, tracking where your money is most important of all. In my opinion, transparency is the greatest edge of DeFi. It is because many users want to have an assurance that their money is in a good place. It is a good thing that people can track and monitor their finances without worrying about where it is or such. If there is transparency, people will surely trust the application or the platform and more people will be interested to use it.
The last advantage of DeFi is that it is built on blockchain security. Again, DeFi is very secured because of blockchain technology. I guess, no one will have second thoughts when they figured out that DeFi is powered by this kind of technology.
Let us now proceed with the difference between DeFi and Centralized Finance.
The major difference between DeFi and Centralized Finance is that in Centralized Finance, it acts as an intermediary that controls and manages the digital assets of an individual and we all know that DeFi eliminates the need for any third party.
When I made research about the differences between the two, I used Blockchain Simplified’s article about “Centralized Finance (CeFi) vs Decentralized Finance (DeFi) — The Battlefield of Cryptocurrencies”. This article provides satisfaction to its readers. I also recommend everyone to use this as a reference.
According to Blockchain Simplified, there is still a lot of difference between the two. Below is a table of differences between CeFi and DeFi. Another table is about the samples of apps in both systems.
One advantage of CeFi is that they support cross-chain exchange for multiple cryptocurrencies and DeFi creates alternatives regarding this issue. Even though there are many differences between CeFi and DeFi, their main motive remains the same which is to facilitate people to use cryptocurrencies for their financial needs.
For me, I still prefer Decentralized Finance to Centralized Finance. If there is a modern finance system that exists, where banks are out of the picture, then I would choose DeFi. I want my finances to be managed by myself only. I guess it is manageable and easy to understand. However, older people might prefer using a centralized finance system. It is still accessible online but there is still an intermediary that can guide anyone to do their task or manage their finances. Each one of us has our own opinion about which finance system we would like to use. The bottom line is — DeFi and CeFi are both modern finance systems that would ease the burden of everyone.
Both Russo and Dowd define DeFi as an ecosystem of financial applications. According to Russo, “DeFi is a growing ecosystem of actual, working protocols and applications, which are delivering value to several thousands of users, and transacting the equivalent of hundreds of millions of dollars in digital assets, every day”.
So, what are these financial applications? MarketDao, Compound Finance, Uniswap, Balancer, Synthetix, Curve Finance, Yearn.finance, and Yam Finance are some applications that are very popular nowadays. But which one do I like the most?
As I carefully studied every application and its uses, I like Uniswap the most. Unlike other protocols and applications which verify the identities of their users and restrict traders from some places, Uniswap is open to anyone because it is an open protocol. All you need to start swapping tokens is an Ethereum address. Also, I like Compound Finance if I am planning to borrow or lend out assets. It is also open to everyone like Uniswap. It is accessible and easy to use.
I tried using Uniswap for the first time. It is amazing how easy to access the application and the website. I tried clicking on “Deposit” in ETH-WBTC. It led me to a new screen where the total deposit is displayed. Also, it changes from time-to-time. However, I realized that you need a wallet to deposit. I was devastated knowing that I do not have any account on any of those wallets. The wallets that are in the choices are Metamask, WalletConnect, Coinbase Wallet, Fortmatic, and Portis. The only wallet that I am familiar with is the CoinbaseWallet. So, if you are new to these platforms, I recommend that you study first and read any articles or watch Youtube guides on how to use such applications. Also, there is a guide for beginners on the lower part of the screen where you can learn more about wallets. I guess it is helpful for your journey in the DeFi world.
While I was in the Uniswap application, I also explored some of its features. I tried using SWAP, where you can swap tokens like Ethereum to Uni. So, I tried looking for SRK (SparkPoint token) on the list. Unfortunately, it is not included and even though you manually put it, there is still no result. However, I tried to use my SparkPoint wallet, and I tried to look for a swap icon. But as I explored my wallet, I instead clicked on “dapps” on SparkPoint’s wallet. It led me to a choice between “Uni” and “NFT”. So, I chose Uni and it led me to Uniswap’s website. An exchange of tokens between WETH and SRK appeared on my screen. Then, if I want to continue, I need to connect it again to a wallet. Meaning, having a wallet is important in DeFi apps.
SparkPoint has a special feature which is the SparkDeFi. It is a governance token-based platform. It offers a Decentralized Exchange (DEX) or what they call “SparkSwap”, P2P lending and borrowing, Multi-staking, and more!
If you want to learn more about SparkDeFi and anything about SparkPoint, visit their official website.
It is good to explore more “dapps” so that you will also have a lot of options. Honestly, at first, I do not have any ideas what DeFi is. But I am grateful that I was given the task to study it. Why? It is because I found it very essential in this generation where technology is getting more complex. I admit, when I started making research about it, I was having a hard time understanding the context of DeFi. It is complicated but I am eager to learn. So, reading and researching are important. Imagine if I am going to study it after 10 years, isn’t it a bit too late? I am not saying that it is that bad if you are going to wait 10 years to learn about DeFi, but at that time, DeFi will evolve.
Based on all the things I mentioned above, I can proudly say that DeFi is truly a game-changer. I am one of those people who like to transact online such as online shopping, online banking, and paying bills online. Why? It is because it is stress-free and hassle-free. Also, why choose traditional ways to pay your bills? You need to get in line in the middle of the day, and your time is being consumed. Worst, you are getting haggard. You do not want to look bad to your love interest, right?
Bottom line is, I strongly recommend everyone to start exploring. We should keep up with technology and make use of it to make our life easier and happier. DeFi has its pros and cons; however, at the end of the day, it is still our decision on how we manage our finances. We should be careful and well-prepared when entering the door of the DeFi world. There is a saying, “slowly but surely.” Plan it out properly and ask experts to prevent mistakes.
Below are some links that I find particularly useful in understanding Decentralized Finance:
CoinMarketCap - https://coinmarketcap.com/alexandria/article/what-is-decentralized-finance
Blockchain Simplified - https://blockchainsimplified.com/blog/centralized-finance-cefi-vs-decentralized-finance-defi-the-battlefield-of-cryptocurrencies/
Coinbase - https://blog.coinbase.com/a-beginners-guide-to-decentralized-finance-defi-574c68ff43c4
