Get to know DeFi, the New Trend of the Blockchain Community and Financial Industry

If there is one trend from the largest blockchain community in recent times, decentralized finance or commonly called DeFi is the answer. DeFi has become quite popular because it integrates the core values ​​of blockchain into the existing financial business.

DeFi generally works with Smart contract on the Ethereum (ETH) platform, one of the most popular crypto assets besides Bitcoin (BTC). Smart contract it allows DeFi to run automatically in the absence middleman or third parties. Smart contract itself is a programming language. This is the main difference between DeFi and traditional financial institutions such as banking, namely disintermediation.

Pandu Sastrowardoyo from Blocksphere explained that DeFi's concept is not really new. Pandu continued that basically DeFi carries an open financial system, which means that there is no control or highest authority that is usually held by banks in traditional financial products.

"So the strength of DeFi is that there is no institution that manages and no there are employees because this is determined by Smart contract with coding. It is transparent for all to see. If in banking we believe in companies, brands, or people, in DeFi we believe in Smart contract"explained Pandu.

DeFi products that exist today are mostly targeted at businesses lending. Some DeFi products that are already quite well known in the world include Compound, MakerDAO, and Synthetic. But the real potential of DeFi can sweep all types of businesses in the financial industry. Savings, loans, trading, to insurance according to Pandu can be offered with the DeFi protocol.

Although the potential for DeFi is quite wide, lending become the most popular sector for DeFi protocol providers. Basically, how DeFi works is determined by two important things, namely: Smart contract and token. These two things replace the entire process run by middleman/third party in centralized finance (CeFi).

In DeFi which produces lending products, borrowers can obtain funds by pledging existing crypto assets. The interest that is installed is also dynamic. The model used in the DeFi system allows borrowers to pay less if there is less demand for loans. On the other hand, if demand is high, Actioncalendar or investors can earn higher interest.

Before 2020, DeFi products have actually appeared. But its existence has only become a sensation since last year. This can be seen from the total value locked in ETH in 2020 reaching $14,74 billion or around IDR206 trillion, a rapid increase from the total value of 2018 and 2019 which was only hundreds of millions of dollars.

In addition to the value of bitcoin that continues to soar and is in demand by the market, the drastic increase in DeFi is also due to regulatory acceptance. The United States Securities and Exchange Commission, for example, make big decisions by approving an ethereum-based managed fund last July. In addition, big players in the financial industry, such as JP Morgan and ANZ, are starting to use blockchain to integrate into their systems.

The lively DeFi has already begun in the country. Although the DeFi products here can still be counted on the fingers, the discussion in the crypto and financial communities is quite lively. VynDAO, UNYdex, and Tadpole Finance is an example of domestically made DeFi. The exception for Tadpole, Indodax's DeFi startup is already on Bithumb Global, an exchange in South Korea that trades fiat and crypto.

Despite all its advantages, DeFi also has a number of challenges. First, blockchain is not completely free from security threats. Next, the collateral value is still too high, it can even be higher than the value of the loan itself. Pandu also added that there was a fraud threat factor that took advantage of hyping Challenge.

"This can happen because making DeFi is very easy. You can do it now," said Pandu.

Chairman of the Indonesian Blockchain Association (ABI) Oham Dunggio said the emergence of DeFi which was quite sensational since last year was a blessing in itself. Although the concept is not new, Oham believes that DeFi is able to move business entities to innovate further on the blockchain network. Oham believes that companies in Indonesia will soon adopt this new innovation, even if it is just an experiment.

"Hype DeFi has more positives than hyping brought by the ICO (initial coin offering) before. Because DeFi is more focused on products, unlike ICOs which are more focused on raising money," concluded Oham.