DeFi is a blockchain-based financial system that does not rely on traditional state-run banking systems and financial institutions. Instead, the DeFi system uses smart contracts integrated into the blockchain as Ethereum does. This system allows users to carry out transactions including lending or borrowing assets without the need for intermediaries. This makes transactions more efficient, faster, and cheaper. In addition, the DeFi system can also be used to store crypto assets and earn interest like a savings system at a bank.
Since June 2020, DeFi created a huge wave in the blockchain industry. Previously, it was thought that crypto assets would stop at digital payment and digital trading functions, but the emergence of DeFi proves that crypto-assets can also be used for loan transactions or “crypto loans”.
This system is also widely regarded as a threat to the traditional financial system. Why? Throughout its history, the traditional centralized financial system (CeFi) has experienced many declines due to factors such as high transaction and operational costs. The processes and regulations are complicated and tend to take a lot of time. On the other hand, DeFi offers the opposite concept and is a solution that can overcome the weaknesses of the CeFi system. For example, their system does not rely on intermediaries which allows transactions to be carried out quickly and does not need to wait for permission (permissionless). DeFi is also transparent and allows all data to be accessed by anyone.
DeFi System Advantages
So, what are the advantages of DeFi which gained fame with crypto enthusiasts. Firstly, due to the nature of crypto assets that puts forward a peer-to-peer system, users have full control over their assets, hence there is no need to rely on intermediaries. Secondly, the decentralized system makes all transaction records transparent and easy to access. Thirdly, with the advanced smart contract technology, transactions have minimal operational risk because there are no third parties and it eliminates any “human error” in the process. While transactions at the bank can be slow and risky due to human error, the DeFi system is automated and more secure because it is handled by a decentralised system that can be checked and scrutinized by anyone. Lastly, the loan process is faster and easier than conventional systems.
Is DeFi reliable? DeFi offers the same loan services as the conventional ones in general. However, before you engage the financial services of DeFi platforms, make sure to do a thorough research first, to understand who is the team behind it, what is the track record of the platform, and what are the features offered. This is necessary to avoid being scammed of your assets.
In addition to the loan function, DeFi tokens can also be traded like crypto tokens. You can also check out the DeFi platform which is an experimental project initiated by Indodax and Tokenomy, known as Tadpole Finance. With a trusted and proven team, Tadpole is an interesting platform for those of you who want to explore more about DeFi!