Over the last few years, people have been talking a lot about DeFi, the benefits it provides, and the risks and challenges that it comes with. It doesn’t matter if you are someone who is switching from CeFi to DeFi or someone who would like to know a bit more about it; you are at the right place. After all, making the right decision always involves the process of weighing all the advantages and disadvantages. Let us look at them closely.
Advantages Of DeFi
- In a traditional financial system, when you want a loan, you always take the help of a bank and waste a lot of your precious time. With the emergence of DeFi, you can do that with just a click at any time of the day from anywhere in the world. All you need is a stable internet connection.
- DeFi is for sure highly private and secure but apart from that it doesn’t even ask you to pass all the steps involved in the authentication process. No need to pass the KYC check or any other identity authentication process. Once you enter the market, you are good to go.
- Thanks to the transparency that DeFi provides. Anyone can see the recording and verification of transactions along with other information easily in it. All the transaction data is available to the public and they can track it whenever they want.
- It would be nothing new if we say that financial crisis frequently occurs because of the mismanagement of Third Party Intermediaries and Central Banks in traditional finance systems. However, in DeFi, human errors are completely removed daily because of smart contracts.
- We have seen how vulnerable the traditional finance systems have become because of the pandemic since they are all about direct contact among individuals. In the current scenarios, DeFi and other cryptocurrencies have been progressing with an increase in their success rate. This is because the physical contact needed to support them is almost zero.
- DeFi has huge growth potential as its protocols are open source. Developers around the world can easily collaborate and add value to the DeFi system. They can build products that are more secure, efficient, and scalable.
Challenges DeFi Projects Are Facing
- One of the major disadvantages of DeFi is that your DeFi project might experience stability issues as the blockchain system that hosts it is experiencing the same. The Ethereum blockchain technology is still undergoing a lot of changes.
- When we say that a digital asset has high liquidity, it means that it has stable prices and a lower transaction time. But a lot of DeFi products do not guarantee high liquidity. This is why they are overshadowed by their centralized finance rivals.
- Insurance is rare in DeFi. Insurance is essential as it protects the investors from hacks and several other fraudulent activities. It is a key piece that is missing from DeFi today.
- One of the major sources of issues in DeFi and its project is the vulnerability of smart contracts. It can include technical and thus financial risks and loss of funds. The slightest code error in the smart contracts and you will have to suffer from great financial losses.
- Anonymity in DeFi products can’t always be seen as an advantage. This is because a few cases have already seen that frauds can benefit from the anonymity factor as well. It can encourage malpractices and malicious manipulations.
- Scalability is yet another big problem that DeFi projects face. Because of this, transactions comparatively take a longer time to confirm and they are really expensive during congestion.
- DeFi projects suffer from high collateralization to counter the removal of certain obstacles. Over collateralization occurs when the asset’s value is very high as compared to the actual loan amount.
Just like other new industries, DeFi still has a lot of problems and challenges that it needs to overcome. It is an experimental technology and it requires specific knowledge for you to get involved in it. DeFi has scalability issues which is why it takes a lot of time to process all the transactions. DeFi highly secure but there is still a possibility of flaw occurrences.
On the other hand, DeFi has brought to us a high level of security, privacy, and potential that makes it a more valuable and promising asset as compared to the traditional financial system. There is a great rise in the adoption of DeFi which means that there is a truckload of business and technical opportunities that are yet to come.