DeFi stands for Decentralized Finance. It means to re-create traditional financial instruments using Cryptocurrency or Blockchain technology to remove the intermediaries, such as exchanges, banks and brokers.

Traditional financial instruments are controlled by a group of human, where it can be prone to fraud, mistake and abuse. Decentralized Finance is controlled by a group of computers.

Hence, DeFi offers the following advantages:
– Privacy, as your identity is not required for each transaction
– Open, anyone can use
– Open, you can use it 7/24
– Open book, you can view all transactions
– Instant, it takes minutes only
– You hold the assets, not the banks
– You control how it works, not the banks

DeFi is powered by:
– Ethereum – the underlying Blockchain infrastructure, where it allows developers to create Smart Contract (dApp – decentralized Application)
– Ether – the native cryptocurrency for Ethereum
– Stablecoin – such as Dai or USDC
Dai is a special stablecoin, unlike USDT and USDC which are backed by real USD reserve, Dai is backed by cryptocurrency reserve. It is a decentralized stablecoin. To get 1 Dai, you would need to deposit Ether worth 1.5 USD, hence it is over-collateral to give protection over the highly volatile crypto market.

There are different use cases of DeFi, such as:
– Decentralized exchange, like Uniswap, SushiSwap, PancakeSwap. There are automated market maker that allows you to swap one token to another token, without an orderbook
– Crypto bank, where you can deposit your crypto asset and earn interest
– Money market, such as Compound, where you can deposit your crypto asset and earn interest
– Prediction market, such as Augur, PredictIt
– Insurance
– Crowdfunding, using Ethereum to create new ERC20 token
– Wrapped Bitcoin, where allows you to send Bitcoin and use directly in an Ethereum network

For lending, it comes with 2 types:
– P2P – peer to peer lending
– Pool-based lending – where it will be managed by the pool
But often the borrower needs to have crypto asset as collateral, such as Ether.
You might ask, if the borrower already have the money, why would he go and borrow more money?
The reason is mainly for trading purpose, as one might want to short a token, hence he deposits Ether to borrow Token A, to short Token A.
But what fuels DeFi is really the monetary incentive behind the scenes, there are 2 concepts here:
– Yield farming: where you deposit your crypto asset into a pool, and it will generate fixed or variable interest (or known as crypto asset). The yield farmer will move the crypto asset from one DeFi market to another DeFi market, creating arbitrage opportunities to maximize the return
– Liquidity mining: this is started by Compound, that allows people to lend and borrow cryptocurrency. For each deposit, apart from earning the interest, you also earn governance token (COMP), that allows you to participate in the protocol voting, such as setting the interest rate, this is what we called DAO (decentralized autonomous organization) In layman term, you can imagine when you invests a fixed deposit in Maybank, you earn the interest plus the shares of Maybank. (you become a shareholder)

Hence, DeFi offers you flexibility to create a “Money Lego”:
– You can first get some Ether using Fiat currency with traditional Digital Asset Exchanges, such as Luno, Tokenize, Sinergy
– Then you can deposit into Compound to get cUSDC
– Then you can further deposit the cUSDc into Aave (a non custodial liquidity protocol)
– You can also buy a decentralized insurance to protect your crypto asset
Investing a DeFi could get a lucrative return:
– Annual Percentage Yield can be as high as 100%, depends on your risk appetite
– Apart from that, you can also enjoy capital appreciation from the governance token price gain (such as COMP and MKR)
However, there are many failed DeFi in the past also, such as YAM, Pizza and Hotdog which has caused many investors to lose their money. Hence, if you are investing in DeFi, invests with the amount of money that you can afford to lost.
In Malaysia, we see the potential as there are not much DeFi players yet, and basically everything in SC – Recognized Market Operators can be potentially disrupted by DeFi.

For instance:
– You can create a DeFi-based P2P lending
– You can also create a DeFi-based crowdfunding
The possibility is endless and up to your imagination!
Have a Blockchain idea? Speak to us at [email protected]
We have been developing Blockchain application since 2017.