The concept of decentralized finance emerged in 2017, about two years after the launch of Ethereum, and ever since, the DeFi ecosystem has seen tremendous growth. The motivation behind this emerging financial technology is to bring financial control from banks and other intermediaries to individuals.
Decentralized finance has restructured the world of finance, and therefore many different key opinion leaders and analysts consider it to be the future of finance. Keep reading to discover how DeFi will define the end of the financial ecosystem.
Secure & Fast Transactions
DeFi goes beyond traditional norms by facilitating fast and secure transactions. Speed, security, and convenience are the core issues of conventional transaction networks. However, large transaction throughput requires enormous paperwork and frequent visits to the bank.
Due to a high degree of centralization, banks’ databases can easily be hacked, and money from all accounts can be stolen. Even the most reputable financial institutions are prone to cyber crimes like hacking.
A secure and transparent payment solution like decentralized finance protects individuals from such risks. By decentralizing services, DeFi makes investors’ assets more secure. Gambling sites like Casino777 also use cryptocurrency technology to process secure and fast payments.
Easier Lending & Borrowing
It often takes a lot of time to get loans approved by banks. This is because they check the borrower’s credit score and require them to put up fixed asset collateral for the loan.
Things are not that complicated in decentralized finance. The process of borrowing and lending has become much easier with DeFi networks. In DeFi, you don’t need to work with banks to approve your loans. By removing intermediaries, DeFi has made direct lending and borrowing possible. However, the borrower still has to put up collateral which could be a crypto asset.
DeFi networks often use over-collateralization to ensure the borrower pays back the loan. Overcollaterization is when the value of the collateral exceeds the loan value.
High Degree of Interoperability
Traditional finance provides a limited degree of interoperability. For example, finance tools like SWIFT only connect one bank to another. DeFi, on the other hand, offers the most significant amount of interoperability across blockchains and between traditional and digital financial spaces.
Decentralization has also been introduced into fiat systems. Now, you can trade traditional financial assets as Synthetic assets in DeFi. However, covering a DeFi or crypto token into fiat or vice versa requires cross-communication.
Passive Income Generation
The DeFi space has many opportunities for the average investor. For example, it’s possible for people who own crypto tokens to earn yields on their cryptocurrency. Various gains methods include staking, trading, liquidity mining, and yield farming.
Honesty, Transparency, & Trust
Corruption has been prevalent in the traditional finance system. The banking sector breeds dishonesty. Irresponsible and corrupt banking practices were the leading cause of the 2008 financial crisis, pushing the economy into recession.
Honesty, transparency, and trust are the core attributes of decentralized finance. All applications of DeFi are based on blockchains where all transactions are unalterable. As all transactions are public on blockchains, anyone can audit DeFi data.
Improved Accessibility
Banks are not open daily, so some transactions cannot be performed during weekends. The DeFi space allows people to execute transactions 24/7 without having their funds approved by a third party.
Most banks work five days per week, eight hours a day. Hence, it could be inconvenient if you want to transfer cash urgently, especially during the weekend. Accessibility and ease are essential in finance.
In 2017, over 1.4 billion people were unbanked. The failure of the traditional financial system to make financial services accessible to all because of reliability and security issues. With DeFi, financial services are accessible to all. You only need an internet connection and a computing device to assess DeFi services.
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