DeFi is booming and has started to take market share from traditional financial institutions. But what makes DeFi so great? In this article we will take a closer look at the benefits that DeFi is bringing to the table.
DeFi vs. Centralized Finance
In centralized finance there is a middle man, usually a bank or an institution, that handles transactions and performs traditional financial services. In DeFi, however, this middleman is cut out. DeFi is built on safe distributed ledgers that are similar to those used by cryptocurrencies. The blockchain helps to make DeFi not only safe, but also truly decentralized.
With the middleman gone, the control is decentralized and the usage fees that financial institutions impose fall away. Anyone who has access to internet can access DeFi applications. A ditigal wallet allows you to access and transfer your money quickly.
A visual representaion of traditional banking and defi.
Benefits of Decentralized Finance (DeFi) Over Centralized Finance:
1. Security
Decentralization distributes access to numerous nodes, or points of contact, located all over the world. Ideally, a network’s security will increase with the number of nodes connected to it. A malicious actor would have to seize control of 51% of the network’s connected nodes, which isn’t impossible but for only a very rare condition.
2. Accessibility
Anyone can connect to and use any decentralized network they choose because a network is dispersed globally via users’ devices. Users can send money and engage with the network in other ways when connected to the network without the restrictions present in conventional finance.
3. Governance
Nodes also maintain total control over upgrades and changes to a DEFI network. Unlike the conventional approach, which involves a centralized entity implementing changes regardless of users’ wants and needs, users must propose and vote on a change for it to be implemented.
4. Economical
Infrastructure, transport fees, and labor fees are being cut, because DEFI money can be sent anywhere in the world that is connected to the network with lesser fees and only within minutes.
These are the benefits of Decentralized Finance(DEFI) over Traditional Finance, but there are also disadvantages.
Disadvantage of Decentralized Finance (DeFi) Over Centralized Finance:
1. Shortage of information
Most of the time DEFI transactions are anonymous so it’s really hard to enumerate if it is legal or fraudulent money.
2. Lack of legal framework
Banks transfer requires many things in the transaction and it is regulated, OTPs, and most of the time banks will call you for the bigger transaction.
3. Lack of support
If a Defi collapse its liability is on its own, sometimes people’s money invested in DEFI are being lost too. The government can’t even help them.
4. Hacker attacks
One of the major problems in cryptocurrency is hacker attacks. Security must be updated from time to time. According to Sunil Jagtiani (Asia Cross-Asset Team Leader), there were $3 BILLION in Defi Hacks in 2022.
Final thoughts:
Despite having many cryptocurrency scams and drawbacks like money laundering, avoidable taxes, and more. De-Fi can bring significant positive changes to mainstream finance. It’s fast, economical, and very convenient for peer-to-peer transactions. It can help people all around the globe with their business, person-to-person transactions, and more.
