Before DeFi, the financial world was a rigid space. Unneeded overlords controlled the flow of money and legal dynamics, and even dictated the eligible players. However, DeFi came to do something different.
DeFi – or, Decentralised Finance – is essentially the building of traditional financial infrastructures and instruments on the blockchain and using smart contracts to achieve decentralization. It employs basic blockchain implementations and other technologies like Oracle to improve functionality.
Decentralised finance mitigates the oversight and control financial institutions, like banks, exercise over money by allowing peer-to-peer transactions using distributed ledger technology. Anyone can explore the benefits in decentralised finance similar to traditional finance: lending, borrowing, insurance, and derivatives.
Middlemen, like brokerages, are a thing in the web3-verse, just like it is in the web2 space, e.g., Crypto exchanges like Binance, Huobi, and Coinbase. With the advent of these centralized exchanges (CEX), the blockchain world hasn’t fully achieved its decentralisation aim as it’s still formative. However, DeFi is an example of what’s obtainable.
Projects that are solely DeFi-based thrive on being non-custodial, and they make all participants anonymous. Having sole control over one’s digital assets and the pseudonymity that comes with it, while replicating the basic dynamics of Wall Street at little to no cost, are the gifts DeFi presents.
Why DeFi trumps TradFi
The time taken to do transactions in TradFi varies. Liquidating or buying stocks, bonds, etc., can take days. DeFi is lightning when it comes to transactions. They go through almost immediately.
It is easy to move assets from one platform to another.
Decentralisation: Unlike TradFi, where intermediaries like Wall Street, banks, etc., are, anybody with a device and internet connection can hop on DeFi platforms to get involved.
Decentralised finance has no boundary nor a restricted jurisdiction. Anyone from anywhere can delve into the space.
The transactions are on a blockchain, so any curious eye can review all activities.
The identities of a player are unneeded as personal information isn’t required to participate.
Why you should be wary of DeFi
- Decentralized finance is still a developing domain, just like its underlying technology (the blockchain). Formative projects tend to be rickety and prone to hitches as it’s uncharted waters.
- Volatility is also another discouraging factor. The decentralized space is highly volatile as its basic infrastructure is cryptocurrency. This can cause sudden changes in gas fees for active transactions.
- As earlier mentioned, the space is still developing, so slight errors in building smart contracts can signal opportunities for hackers to exploit.
While DeFi is certainly still in the burgeoning stages, it’s pros undoubtedly outweigh it’s cons – in both broad strokes term in how it’s disrupting sectors that have too long remained stagnant, and also in the fact that it’s shortcomings can be mitigated through the user by being thorough and measured in how they approach DeFi.