Title : Decentralized finance: What we need to know?

Author: Ahmad Syakir Bin Junoh @ Ismail, Dr Mohd Ikhwan Aziz

Decentralized finance, or DeFi for short, is a rapidly growing sector in the world of
cryptocurrency and blockchain technology. At its core, DeFi is a movement that aims to create a
more open and accessible financial system that is not controlled by any central authority. This
new financial ecosystem is built on top of blockchain technology and is powered by smart
contracts, which are self-executing contracts that can be programmed to perform certain tasks
automatically.

One of the main benefits of DeFi is that it allows for greater financial inclusion. Traditional
financial systems are often exclusive, with strict requirements for opening accounts or obtaining
loans. In contrast, DeFi platforms are typically open to anyone with an internet connection and a
digital wallet. This means that even those who have been excluded from the traditional financial
system, such as those without a credit history or those in developing countries, can access
financial services through DeFi platforms.

Another benefit of DeFi is that it allows for greater transparency and security. Traditional
financial systems rely on centralized servers and databases, which can be vulnerable to hacking
and other forms of fraud. In contrast, DeFi platforms are built on blockchain technology, which is
inherently secure and transparent. All transactions on a blockchain are recorded in a public
ledger that is accessible to anyone, and smart contracts ensure that transactions are executed
automatically and transparently.

DeFi also allows for greater flexibility and innovation. Traditional financial systems are often rigid
and slow to adapt to new technologies or changing market conditions. In contrast, DeFi
platforms are built on open-source software and are highly customizable. This means that
developers can create new financial products and services quickly and easily, and users can
choose from a wide range of options.

Some of the most popular use cases of DeFi include lending and borrowing platforms,
stablecoins, decentralized exchanges, and prediction markets. Lending and borrowing
platforms, such as Compound and Aave, allow users to lend and borrow cryptocurrencies with
each other without the need for a central intermediary. Stablecoins, such as DAI and USDC, are
cryptocurrencies that are pegged to the value of a fiat currency, such as the US dollar, to reduce
volatility. Decentralized exchanges, such as Uniswap and Kyber Network, allow users to trade
cryptocurrencies without the need for a central intermediary. And prediction markets, such as
Augur and Gnosis, allow users to make predictions about future events and earn rewards for
accurate predictions.

Despite the many benefits of DeFi, there are also some risks and challenges that must be
addressed. One of the main risks is the lack of regulation. Because DeFi platforms are
decentralized and operate outside of traditional financial systems, they are not subject to the
same regulations as traditional financial institutions. This can make them vulnerable to fraud
and other forms of misconduct. Another risk is the lack of liquidity. Because DeFi platforms are
still relatively new and not widely adopted, it can be difficult for users to buy or sell assets on
these platforms.

To overcome these challenges, it is important for the DeFi community to work together to create
standards and best practices for the sector. This could include creating a self-regulatory
organization to oversee DeFi platforms, or working with regulators to create a framework for
regulating DeFi. Additionally, the community should focus on creating more user-friendly and
accessible platforms to attract more mainstream users.

Overall, Decentralized finance is a new and exciting sector that has the potential to revolutionize
the financial industry. With its potential for greater financial inclusion, transparency, security,
and innovation, DeFi is poised to become a major force in the world of finance. However, there
are also risks and challenges that must be addressed, and it is important for the DeFi
community to work together to address these challenges.