What is DeFi? Can i use it to earn with my cryptocurrency holding? Is it risky? Can it change the future of finance?

We will answer this questions in this article. So better read the full article to fully understand DeFi.

CeFi - centralized finance

Transferring money is one of the many building blocks of a financial system service. Aside from this, we have a variety of services we used today. For example, loan, savings plan and insurance are all build by money and together creates the financial system.

Finacial system are all centralized. Banks, stock market, insurance company and other financial institutions have the authority to control this servives.

This centralized financial system has a risk like fraud, mismanagement and corruption. So what if, we decentralized the financial system as a whole like how bitcoin decentralized money. This questions is the start of DeFi.

What is DeFi?

• Decentralized Finance or simply called DeFi, is a financial services with no central authority or someone is incharged

• The used of decentralized money like cryptocurrencies that can be program with automated activities, we can build services like loan services, insurance and saving plans that don't have a owner or no one has the control to anything.

There are several components to create a decentralized financial sytem. This is as follows.

1. Decentralized infrastructure- Infrastructure for programming and running decentralized services. Ethereum is the best example of this. Thru ethereum, we can write automated codes called smart contracts that manage any financial service that we created in a decentralized manner. Once we set rules in the financial service and deploy it in the ethereum network, we will not have any longer control of it.

2. Decentralized (stable) money - stablecoins are cryptocurrencies are pegged to the value of real money like US dollar. DAI is the best example for this. Dai stablecoin is a cryptocurrency paired against the value of US dollar, 1 dai = 1US dollar.

3. Decentralized financial sercives

   • decentralized exchange or called DEX operates in a set or rules or samrt contract that allows users to buy, sell or trade.

   • Decentralized money market are services that connects the borrowers to the lenders

DeFi works in conjunction with one another, making it possible to mix and match diferrent services to build a new and exciting opportunities. It resembles how you use lego blocks to build something creative or wahtever it is. Hence, DeFi services is also coined as "money legos".

DeFi advantages

1. Transparency

2. Interoperatibility

3. Decentralization

4. Free for all sercives

5. Flexible user experience

DeFi disavantages

1. It is still in infancy stage- this means its not totally safe yet

2. Some sercives may be partially decentralized

You can avoid this by first doing research on the services you intend to invest to and cautiously use small amount of money.

Always remember, invest what you can afford to lose.

Conclusion

DeFi is in an early stage and may take some time for mass adoption. But i think it will have benefits to some population that suffers financial discrimination and inefficiency in managing their funds.