Decentralised Finance, or DeFi, is gaining traction throughout the world. The numbers do not lie — according to DeFi Pulse, a DeFi data aggregator, the total value locked (TVL) for the US Dollars (USD) has increased three-fold throughout 2021.
A sizeable US$30 billion was locked across many DeFi networks and applications such as DFX, UniSwap, ZilSwap, among many others, in January 2021. This increased to US$90 billion by the end of December 2021. There are reasons for this increasing traction, for which we shall explore below.
Essentially, “DeFi” is short for “Decentralised Finance”.
“Finance” itself is already a vague, umbrella term, and adding the word “decentralised” makes it even more vague. How do we make sense of DeFi?
Think of finance as a highly interconnected network of highways, airports, sea ports, and all that.
You are a traveller, wanting to get to your destination to meet a loved one. You have a number of options to get there. You can get there by plane, car, boat, or even by foot. You choose to go meet your loved one by car, for example.
On the way to your destination, you encounter immigration authorities. There is a person, or an entity, gatekeeping you from getting to your destination. Assuming you pass all the checks, you can proceed with your journey.
After dealing with immigration, you encounter tolls along the way. In theory, the tolls collect a fee from the traveller to maintain the roads. But in practice, does the toll money you pay really go to the maintenance of the roads? There are cracks everywhere, and it still takes forever to get somewhere! What’s more, you don’t know the specifics of where your toll money is going.
This is essentially the world of traditional finance. To make a transaction, you have to go through many intermediaries, pay many fees, or both.
In the analogy above, the immigration is the intermediary that screens you on your way to your destination. Likewise, in traditional finance, intermediaries include banks, financial institutions, regulatory bodies, and more. Tolls are the arbitrary fees that banks or greater financial institutions charge for using their services. Sometimes they can be reasonable, sometimes they just aren’t.
DeFi aims to provide traditional financial services, without the intermediaries or paperwork. Everything is publicly documented and readily available on a blockchain network, and all the work is done by automated algorithms.
The way you transact with your chosen party is with your chosen blockchain network’s cryptocurrency, like Ether (ETH) on the Ethereum network.
Ideally, DeFi aims to be always on, 24 hours a day, 7 days a week, but sometimes even some of the biggest blockchain networks like Ethereum can have downtime. Still, DeFi holds a lot of advantages for the common person as compared to traditional finance.
To better illustrate the difference between DeFi and traditional finance, we boiled down the factors that differentiate the two:
DeFi (Decentralised Finance)
Of course, there are some caveats to DeFi. Using DeFi assumes that you have a stable internet connection, and the technological infrastructure like running electricity, a computer or mobile phone. For some parts of the world like Indonesia, that simply isn’t the case.
In fact, 66% of Indonesia’s population, or 180 million people, don’t own a bank account, and fewer than 40% of Indonesia’s smartphone users have ever used a financial service app. To name a few of these apps, think of Venmo in the US, PayNow in Singapore, or even using their bank’s official app is alien to many Indonesians.
Accountability is also another sticking point that DeFi critics put across. Yes, all transactions are recorded on the blockchain network, but your identity is pseudonymous. You are identified on the blockchain network as a string of unintelligible letters and numbers, not as John Doe from California, USA. For some people, this is a good thing, but for many others, it might not be.
As mentioned above, blockchain networks are prone to outages, and these networks are not immune to fees either. The biggest example of this would be Ethereum, which charges “gas fees” to use its blockchain network
That being said, DeFi opens a world of possibilities for those who have just dipped their toes in it.
There are tons of things you can do with DeFi:
There are tons of use-cases for DeFi, but above all, DeFi aims to make financial activities as efficient, as borderless, and as available as possible. Sure, Indonesia has a long way to go to provide its unbanked population with basic financial access, but that means that when they’re finally onboard, they do so with fresh eyes.
StraitsX is well-positioned to provide the basic foundations of the rapidly evolving world of DeFi, and traditional finance at large. With DeFi gaining so much traction throughout the world, it’s inevitable that everyone’s lives would be intertwined by it somehow.
The number of DeFi applications across the web is more than the mortal mind could ever hope to fathom. But if you’re looking for a base to start, StraitsX has some partners that you could tap on:
As mentioned above, DFX, Uniswap, and Zilswap allow the use of XSGD or XIDR as your stablecoin of choice. This is especially advantageous for you, because it saves you the headache of needing to convert your existing cryptocurrencies or fiat currencies to USDC, the world’s leading stablecoin. Simply transact in your native fiat, or cash currency!
It’s a simple process: