DeFi Explained

Banks/ or brokerage are middlemen authorities. Their function is to carry out the process of payment. Until the bank approves, your payment will not process. And this is a centralized system where authorities like the bank are in charge of the entire banking system. What if there is a financial system that eliminates the role of Middlemen to process payments? With the emergence of blockchain technology, we now have the DeFi.

What Is DeFi?

DeFi or decentralized finance has been a game-changer in the financial space. It is a top-notch solution that removes the centralized system of banking and removes any middlemen involved. And this system involves peer-to-peer payment transfers where no middlemen are involved. It uses blockchain technology to transform conventional finance via online payments.

Advantages

  • The word ‘decentralized’ in decentralized finance largely defines its identity as it reduces the dependency on corporations. To withdraw even a penny from your account, the bank will approve your transaction. But DeFi users can do it without any permission.
  • How do you get a loan? You go to a bank, waste a lot of time standing in line, and based on your credit rating, you get a loan. That’s not the case with DeFi. With DeFi, you can opt for a loan with a single click anytime & anywhere as long as you have an internet connection.
  • To open an account, initiate payments, or use any financial service, you provide your identity details to the bank. With DeFi, there is no need for this. Smart contracts are initiated, and the process is automatic.

Disadvantages

  • The scalability of DeFi projects is a big problem. And this problem leads to problems like transaction speed. In DeFi, an average of 13 transactions per second can take place, while banks process thousands of transactions in a second. Transaction speed is a big issue. But per transaction charges are also very high.
  • Insurance is important to safeguard your money. Your money in banks is somewhat insured, it is rare in DeF.
  • Transactions in the DeFi world are impossible to track or trace. While this seems a great advantage, it is a disadvantage too. Assume terrorists are buying illegal firearms and weapons using DeFi. It will be impossible to track them.

DeFi is the potential future. A new and powerful concept brings great opportunities to make money. If you understand this space, you can be an early investor and make a lot of money. But decentralized finance brings in a lot of responsibility too. Before you jump into this space, you need to understand it well.

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