“Removing intermediaries does not remove risk — it redistributes it.” — DNA Crypto.
The history of finance is long and complex. You can better understand the new idea of adding the term ‘Decentralised’ by briefly reviewing the history mentioned. In the very beginning, finance had no say in human society. The basic needs were food, shelter, and, to some extent, survival. However, as time progressed, the need for human interaction became essential; to facilitate this, trade emerged. Trading during this period was basic: you exchanged what you had in abundance for what you lacked.
The Downside
However, the problem with this trading method was the absence of clear criteria for determining the value of goods. As the variety of goods continued to expand, the desire for clear criteria also grew, thereby prompting the development of money systems around 600BC. Unfortunately, the narrative doesn’t end with this happy ending. A new problem has emerged: who should control the money systems? Having money under the control of a single entity. i.e., the government has one primary concern: the unrestricted printing of money. The invention of cryptocurrencies such as Bitcoin marked the first step in providing people with a reliable financial system. However, this can still not be considered decentralised finance, as most cryptocurrency financial transactions are conducted through centralised exchanges.
What is DeFi?
DeFi (version 2.0) is a rapidly growing sector in the crypto industry, comprising numerous projects across various blockchains. Most services provided by traditional financial systems can be performed through DeFi without the involvement of third parties, such as banks. This is the most prolific feature of DeFi. Most people believe that DeFi is the future of financial systems; these are some of the reasons that support this view: Error-free. The mismanagement of central banks and third-party intermediaries has caused a significant crisis in the current financial system. However, the introduction of smart contracts seeks to eliminate these day-to-day errors.
A Fast And Permanent Access
In the traditional financial system, obtaining a loan is a lengthy and often frustrating process. You must be available to complete several documents at specific times. However, for DeFi, it is quite different. You can easily get a loan from anywhere, anytime, as long as you are connected to the internet.
Healthier System.
The outbreak of the Coronavirus exposed the vulnerability of our current financial systems. Centralised financial systems depend on interpersonal contact. For DeFi, the percentage of contact required for a financial transaction is zero. Freedom: In traditional financial systems, you must obtain permission from intermediaries to conduct any financial transaction. In DeFi, users can interact with financial services without asking for permission.
However, like any other system, DeFi also has its risks and disadvantages. Here are some of the challenges that DeFi projects face.
- Uncertainty – Suppose the blockchain that powers the DeFi project is not stable; the project also becomes unstable.
- Scalability – Either a transaction process takes too long to be confirmed, or the cost is too high during congestion.
- Issues with smart contracts – If a flaw occurs in a contract, however minor it might be, funds might be lost.
Other disadvantages of DeFi include low liquidity, over-collateralization, limited interoperability, and the absence of insurance.
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice
