What is DeFi? Two reasons that are attracting attention and the advantages and disadvantages of purchasing
"What is DeFi that you often see in cryptocurrency news these days?"
"Why is DeFi so exciting now?"
When I look at the news of virtual currency (cryptographic assets), I often see the word "DeFi" recently. Perhaps some readers say, "I know the word DeFi, but I'm not sure what it really is ...".
DeFi (Decentralized Finance) is one of the hottest keywords in the crypto asset industry in 2020. As of September 2020, the total amount invested in DeFi-related services has exceeded $ 8.2 billion, and the market is still growing at an alarming rate.
If you want to trade virtual currencies, you should definitely keep your knowledge about DeFi. Therefore, in this article, we will explain the advantages and disadvantages of DeFi from the basic information, and the reasons why DeFi is attracting attention.
What is DeFi (decentralized finance) of virtual currency?
DeFi (Decentralized Finance) is a general term for financial services and ecosystems built on the blockchain , and is called "decentralized finance" in Japanese.
More specifically, "a system that provides financial services such as banks, securities, insurance, and crypto asset exchanges using blockchain" can be defined as DeFi (decentralized finance). I will.
DeFi services currently being deployed include the following.
・ Decentralized exchange (DEX) without a central administrator ・
Lending of virtual currency (lending to a third party to earn interest)
If you have traded crypto assets, you may have a familiar service. All of these fall into the DeFi service.
Many DeFis use the Ethereum (ETH) blockchain
Most of the DeFi-related services currently being deployed use the Ethereum blockchain .
Recently, "yield farming" and "liquidity mining", which earn interest by operating Ethereum crypto assets (ERC20 tokens) with DeFi's lending service, are gaining popularity among investors.
Differences from CeFi (Centralized Finance)
In the world of cryptocurrencies, there is a system called CeFi (Centralized Finance) that is compared with DeFi. CeFi, which is called "centralized finance" in Japanese, is known as a companion to DeFi as a conventional system that provides financial services through companies and organizations.
DeFi's basic philosophy is to realize a highly transparent service that anyone can view and verify by using blockchain technology. CeFi, on the other hand, refers to an organization that handles crypto assets among traditional financial institutions and companies.
Three benefits of DeFi
There are three main advantages of DeFi:
1. You can trade without an intermediary financial institution
2. Fees may be low
3. Even people who cannot use conventional financial services can use it
Let's take a look at what each of them is in turn.
1. You can trade without an intermediary financial institution
The first advantage of DeFi is that you can trade without the intervention of a financial institution.
For example, when transferring money to someone, traditional financial services require intermediaries such as banks and post offices. However, with DeFi, it is possible to transfer directly through the blockchain without an intermediary.
2. Fees may be low
DeFi is also attractive because fees may be lower than those of centralized financial institutions.
As mentioned above, DeFi, which uses the blockchain, allows direct transactions and contracts between the parties without going through a third party. Another big advantage of DeFi is that there are cases where the service fee is low because there is no extra brokerage fee when trading.
3. Can be used by people who cannot use conventional financial services
According to a World Bank survey, as of 2018, there are 1.7 billion adults worldwide who do not have a bank account, and 1 billion in Africa alone.
Many people living in developing countries, such as Africa and Asia, cannot use traditional financial services, for example because they cannot pay fees.
In that respect, DeFi, which does not require any special screening and has a low fee, can be used by anyone regardless of income or area of residence.
Two disadvantages of DeFi
While DeFi has many advantages, it also has the following disadvantages.
・ There are voices who regard the bursting of the bubble as dangerous.
・ If there is a problem, it will be the user's own responsibility. I will
explain one by one.
1. There are voices who regard the bursting of the bubble as dangerous
DeFi is a new system, so it hasn't had much credible track record yet.
It is certain that expectations for DeFi technology are a factor in the recent boom in the DeFi market, but on the other hand, there are voices who regard the "collapse of the DeFi bubble" as dangerous due to the excessive excitement reminiscent of the former ICO bubble. Not a few.
In fact, Ryan Serkis, the founder of cryptocurrency research firm Messeri, said in a tweet on September 10, 2020 that the "DeFi bubble will collapse sooner than people think." ..
Source: https://twitter.com/twobitidiot/status/1304067226807533568
2. If there is a problem, it will be the user's own responsibility
Any problems that occur while using DeFi's services are at your own risk.
In the case of a centralized financial institution, when a problem occurs due to a system failure, the operator is generally responsible for compensating for the loss of the user.
However, DeFi, which does not have a clear operator, does not have such a compensation system, so if a problem occurs while using the service, the user must take responsibility.
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