The previous article traced the reason for the fall of FTX: the centralized management structure prevented the blockchain’s decentralizing nature from being fully utilized, and the sensitive market atmosphere. The FUD, thus, became the last straw and being ‘kill`` it was assumed as an enterprise that ‘too big to fail’. When the problems of centralization continue to emerge, it might be appropriate to shift the sight upon Decentralized Finance (DeFi).
What is DeFi?
As mentioned in the previous article, decentralization is the core and most prominent essence of the blockchain. DeFi is the best example of this decentralizing nature.
The financial world today is basically a centralized one, or one may name it ‘Centralized Finance’ (CeFi). As its name suggests, CeFi refers to a series of crypto trading activities that have to be done through a centralized medium, which involves loan servicing, buying insurance, earning interests, and more. During the trading progress, the third party platform will first collect the digital assets from the buyer’s wallet. Upon verifying the transaction, the platform will send the payment to the seller’s account. DeFi, with blockchain technology, is different from CeFi, in terms of its ability to complete transactions through a peer-to-peer (P2P) mode.
The advantages and disadvantages of DeFi
As a financial system that is established on the blockchain, DeFi can get rid of the restrictions of centralized finance, its transparency is another crucial advantage. Using DeFi allows for:
• Security and Transparency:
Smart contracts published on a blockchain and records of completed transactions are available for anyone to review but do not reveal your identity. Blockchains are immutable, meaning they cannot be changed.
• Autonomy:
DeFi platforms don't rely on any centralized financial institutions and are not subject to adversity or bankruptcy. The decentralized nature of DeFi protocols mitigates much of this risk.
• Accessibility:
Anyone with an internet connection can access a DeFi platform and transactions occur without any geographic restriction. In addition, no repetitive administration tasks, such as applying for accounts and signing documents, are needed.
The aforementioned points demonstrated how DeFi is releasing users from the boundaries of the traditional centralized financial system. However, one should admit that DeFi, as a new product, still gets its room for improvement.
Firstly, the traditional hot money has not yet poured in. Compared with traditional financial institutions, that have accumulated assets for a long time, most of DeFi’s asset investment sources, though an upward trend can be observed, come from the cycle of cryptocurrency. The second is the security of smart contracts. Despite the immutability of smart contracts, users’ negligence or greed often create opportunities for hackers, especially when policy and supervision have not reached into the DeFi field. UD, thus, repeatedly reminded everyone of the importance of security.
What’s the reasons that financial market needs DeFi?
Using blockchain technology, DeFi completely solves the issue of identity verification and the additional costs incurred due to the participation of a third party. The accessibility of DeFi makes the financial service more affordable and down to earth; also, DeFi offers 24/7 access to financial services. Most importantly, DeFi allows users to enjoy a higher degree of security: your access is fully controlled by you and not by the financial institutions.
That’s how DeFi is reinventing the financial world. And the point is, DeFi is approaching you much faster than you imagine. How is it? Stay tuned for updates.
