XIDR

StraitsX Academy #1: What is DeFi?

February 17, 2022

Decentralised Finance, or DeFi, is gaining traction throughout the world. The numbers don’t 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.

What is DeFi?

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?

An analogy of finance with travel

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 fees that banks or greater financial institutions charge for using their services. Sometimes they can be reasonable, sometimes they just aren’t.

What DeFi aims to do

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.

How is DeFi different from traditional finance?

To better illustrate the difference between DeFi and traditional finance, we’ve boiled down the factors that differentiate the two:

DeFi (Decentralised Finance)


 

DeFi (Decentralised Finance)

Traditional or Centralised Finance
Audience

Everyone with access to the internet

Well-connected investors within the traditional financial landscape 

How money is held

Money held as cryptocurrencies on peer-to-peer blockchain networks

Money held as cash, bonds, or valuable goods like gold in institutional treasuries or banks

Availability

24 hours a day, 7 days a week

Depends on centralised exchange trading hours 


(e.g. NYSE 9:30am to 4:00pm on working days only)

Transparency

Always visible on the blockchain network

Need to wait months before results of independent audit comes out

Transaction time

Within 15 minutes

Within 3 working days

Market capitalisation 

(caa 15 February 2022)

~US$1.9 trillion

~US$27.69 trillion (NYSE) ~US$24.5 trillion (NASDAQ) ~US$8.15 trillion (SSE)

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. 

Normally, this isn’t a problem in highly developed countries like Singapore, but 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.

Lastly, regulatory bodies around the world are stepping up their rulebooks as DeFi gains traction. In Singapore, depending on the nature of the DeFi protocol or platform, certain aspects of it may be regulated under  the Securities & Futures Act (SFA), and the Payment Services Act (PSA), whereas in Indonesia, there has not been any laws that directly acknowledge or regulate the concept of DeFi yet.  

With all that being said, DeFi opens a world of possibilities for those who have just dipped their toes in it.

What can you do with DeFi?

There are tons of things you can do with DeFi:

  • DeFi democratises financial activities so that everyone has access to the network with an internet connection.
  • DeFi cuts away middlemen and their fees.
  • DeFi’s barrier of entry is relatively low, stake whatever amount of money you’re comfortable with into existing pools and reap attractive yields.
  • DeFi allows users to mint, swap and redeem stablecoins across different blockchain networks such as DFX, UniSwap, ZilSwap.
  • DeFi allows purchases of NFTs without being locked to a particular network.
  • DeFi allows anyone to provide liquidity. (More on liquidity provision in the future!)
  • DeFi is always-on, and has relatively fast transaction times.

DeFi is DeFinitely the Future

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.

How do I get started with DeFi on StraitsX?

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: 

  • DFX, a decentralised foreign exchange protocol where you can swap ERC-20 XSGD or XIDR tokens with other stablecoins, and provide liquidity with XSGD or XIDR 
  • Uniswap, one of the leading decentralised foreign exchange protocols where you can swap ERC-20 XSGD or XIDR tokens with other stablecoins, and provide liquidity with XSGD or XIDR
  • Zilswap, a decentralised foreign exchange protocol where you can swap ZRC-2 XSGD or XIDR tokens with other stablecoins or assets like NFTs

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!

How do I get XSGD or XIDR on StraitsX?

It’s a simple process:

  1. Sign up for a StraitsX Personal Account or StraitsX Business Account.  
  2. Verify your identity and upload the required documents.
  3. Make a Transfer In from your bank account to your StraitsX Personal Account or StraitsX Business Account to mint XSGD or XIDR
  4. Transfer Out your XSGD or XIDR to any one of our DeFi partners:  DFX, Uniswap, and Zilswap.
  5. Begin your DeFi journey from there!

Ready to get started?

Mint and redeem StraitsX stablecoins, manage payments, view transactions and more.